What Does “0% APR” on a Credit Card Mean?

stock data

Image source: Getty Images

by Steven Porrello

 Source: Getty Images

In Canada, you might see certain credit cards advertising an introductory “low APR” or “0% APR” as a promotion (often called balance transfer credit cards). Essentially this means that for a certain period, usually between six to 12 months, your credit card issuer will charge less interest to unpaid balances than a normal credit card. For those looking to get out of credit card debt, these cards can be a lifesaver, especially if you manage to pay off your full balance within the promotional period.

How exactly does a credit card with a low promotional APR work, and is one right for you? Let’s take a closer look and see.

What does “low promotional APR” mean?

Recall that an annual percentage rate (APR) is how much your credit card issuer charges you on unpaid balances. It’s basically the cost of borrowing money if you don’t pay off your full credit card statement. Given that credit cards have steep interest rates — think 19.99% to 29.99% — you could easily find yourself paying a significant amount in interest if you don’t pay your balance in full and on time every month.

A low promotional APR credit card, on the other hand, cuts these interest rates significantly for a certain amount of time. Some of the best credit cards with low APRs have introductory interest rates ranging from 0% to 1.99%. If you’re currently carrying a balance on a credit card with an APR of, say, 19.99%, you could save a significant amount by transferring your balance to a card with a lower interest rate.

One small note: sometimes, you’ll find a credit card with a 0% APR offer (it’s very common in the United States). In Canada, however, you’re more than likely to find a credit card with an extremely low promotional APR rather than 0%.

Finally, it’s important to note that a card with a low promotional APR is different than a card with just a low APR. Some credit cards in Canada will offer lower-than-average APRs permanently. Even though these APRs are lower than an average credit card, they’re typically not lower than a card with a low promotional APR.

How long does the promotion last?

Typically, the promotional period lasts anywhere from six to 12 months, though some cards will offer less (or more) time than that. For longer periods of time, you may have to pay a small annual fee to use the card.

What happens when the promotion ends?

When the promotional APR ends, your card will start charging a new APR to unpaid balances. This new APR will be significantly higher than your promotional one, often double, triple, or even quadruple. For this reason, you should aim to pay all of your credit card debt (or the majority of it) before the promo ends. That way, you don’t have to face the steep interest rate charges when the time comes.

Why get a credit card with a low APR?

The number one reason to get a card with a low promotional APR is for a balance transfer. A balance transfer basically moves debt from one credit card (usually one with a high APR) to a balance transfer card with a much lower interest rate. The low APR on the new card allows you to pay less in interest and more toward your balance, helping you get out of debt faster.

When you transfer the debt to a balance transfer card, you’ll typically pay an origination fee on your old card, usually 3% to 5% of the balance you’re transferring. Though this fee may seem pesky, it’s usually small in comparison to what you’ll save on interest.

Of course, to benefit from the balance transfer, you’ll want to pay off as much credit card debt as you can during the promotional period, ideally all of it. Once the promotion ends, your credit card’s APR will rise to a much higher rate. If you haven’t paid off a significant portion of your debt, you’ll find yourself in the same debt accumulating hole as before.

Another reason to get a low promotional APR card is when you’re about to make a large purchase. A promotional APR gives you more time to pay down your charges without accruing a significant amount in interest. Just be careful here: make sure your card’s low APR applies to new purchases, too. Many balance transfer cards, for instance, offer low APRs for the transferred balance only with a higher APR for new purchases.

Should you get a card with a low APR?

Do you have high amounts of credit card debt? Do you need help paying off your credit card balance? If so, a balance transfer card with a low promotional APR could help you save money in the long run.

Before you take out a card with a low promotional APR, however, be sure you have a payoff plan. These cards work best when you pay a majority of your credit card debt before the promotional period ends. If you don’t pay down your credit card balance during this period, you’re only delaying the time when you’ll have to pay interest on it.

And trust us — the longer you delay paying your credit card debt, the more you’ll pay overall, as even a low APR card charges some interest.

If you approach your balance transfer credit card with a payoff strategy, however, you can leverage the full benefit of your card. Many of Canada’s best balance transfer credit cards come with long promotional periods and low introductory interest rates, helping you pay off your full balance before the promotion ends.

Some offers on The Motley Fool are from our partners — it’s part of how we make money and keep this site going. But does that impact our reviews? Nope. Our commitment is to you. If a product isn’t any good, our review will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market.