The 0 APR credit card is a good way to help you build temporary cash flow as you just need to pay minimal due for a period, such as 12 months or even 24 months, without any interest. In another word, it works as a free personal loan!!
If there is no consequence, 0 APR card sounds too good to be true. Unfortunately, it does have some consequences. I am not talking about that when the promotion period ends, whether you can pay off the balance or not. This issue completely depends on your personal financial plan and capacity. I just want to let you know that it will hurt your credit score dramatically.
Basic of Credit Score
There are five parts contributing to your credit score: credit history, payment history, balance ratio, hard pull, and type of credits. Among all these factors, balance ratio and payment history are the most important things.
Payment history is easy to understand, which reflects whether you missed any payments. Of course, the lender won’t lend money to a person with bad payment history. At the same time, if the person owes too much money, it also means a red flag for the lender, as the borrower may not be able to pay off his debt in the future.
That’s why the balance ratio is very important. It includes 2 parts:
- total balance with your total credit limits. For example, you have 3 credit cards with total limits of $20,000. Now you have a $3000 balance across all cards, your total balance ratio would be 3000/20000, which is 15%. Normally, the lender like this ratio is lower than 30% if you want to apply for new credit.
- Single balance ratio. For example, if one of your credit cards has a limit of $6000, but if you have a $3000 balance on it, your single balance ratio is 50%! This is unacceptable for lenders because they like your single balance ratio also could be lower than 30% and best for only 10%.
The lender will consider these 2 types of balance ratios together. So, for the person in the example above, even though his total balance ratio is only 15%, one of his credit card balance ratios reached 50%. This will hurt his credit score a lot!
Why 0 APR Credit Card Matters
Now you should understand why 0 apr card will hurt your credit score. Let’s see, you have a credit with $10000 limits, then you spend $6000 for a large purchase and get a 0 APR for 12 months. Yes, you are saving interest for not paying in full during these 12 months, but this card will carry a high balance ratio. The ratio is as high as 60% at first and will gradually decrease, depending on the payment you made. If you just make the minimum payment to save more cash flow for other purposes, it will maintain high. So, before you make any major payment, this ratio won’t decrease too much, and your score will be hurt badly.
How to Avoid This Trap
You can use a 0 APR business credit card instead. As the business cards and their balance won’t be on your personal credit report.
Another way is using Charge Cards. Charge Card is a special”Credit Card” without preset limits. The most famous charge card is the American Express Platinum Card/Gold Card. Since they don’t have preset limits, even if your carry a high balance, there is no way to calculate the balance ratio for this card. But the balance will count into the total balance ratio. However, if your total credit limits are very high, the influence will be diluted.
In summary, 0 APR card has a big influence on your credit score if you cannot handle it right. So If you have some incoming applications for auto loans or mortgages, it is better to avoid the 0 APR card.