How Do Zero Interest Promotional Rates Work

Learn to Spot a Great Promo Rate

A man and his dog look at a phone.
•••

Drazen Zigic / Getty Images

A credit card's promotional rate, or promo rate, is a low interest rate offered on your credit card balance for a certain period of time. The promotional rate is often an introductory interest rate only offered during the first few months after you open the credit card account. Occasionally, some credit card issuers offer promotional rates to existing credit card users.

Promotional Rates Last for a Certain Amount of Time

Federal law requires that promotional rates must last at least six months. Despite the minimum requirement, many of the best credit cards have promotional rates that longer, even as long as 21 months.

Having a longer promotional period gives you more time to pay off your balance and avoid paying any interest.

The timing of the promotional rates varies by credit card issuer. Some credit cards express the promotional rate as a number of billing cycles which may be shorter than the same number of months. For example, a 10 -billing cycle promotional period would last around 8 months (assuming a 25-day billing cycle).

Your promotional rate is generally locked in for the promotional period. However, you could lose your promotional rate prematurely if you all behind on your credit card payments before 60 days. At that point, the credit card issuer will apply the higher penalty rate to your balance until you've made your payment on time for six months in a row. Once you've lost the promotional rate, you won't get it back, even once you're caught up on payments.

Certain Balances Get Promo Rates

Promotional rates may apply to purchases or balance transfers or both. Cash advances, however, rarely receive a promotional interest rate. Your credit card provider may have time period restrictions on application of promotional rates to each transaction type and may have additional rules around when such transactions may take place.

For example, for the Citi Simplicity credit card, zero interest rate is applicable for 12 months on purchases and 21 months on balance transfers with an additional requirement that balance transfers need to be completed within four months of opening the account.

While you wont be paying, keep in mind that balance transfers may be subject to transfer fees. For example, the Wells Fargo Reflect card applies a transfer fee of $5 or 3% of transfer amount (whichever is greater) in the first 120 days. After that, the transfer fee goes up to either $10 or 5%.

So how much can you save with a balance transfer to a zero interest card? Here's a sample calculation of potential savings using an amortization calculator.

If you have a $10,000 balance on your credit card that charges 20% interest, over 12 months, you'd end up paying a total of $ 11,116.14 ($10,000 principal and $ 1,116.14 in interest), with a monthly payment of $926.35. However, if you moved that balance to a zero interest card that offered the promotional rate for 12 months just the principal ($10,000) with a monthly payment of $833. That's a total saving of $1,116.14. Even if the balance transfer fee is 3%, or $300 (3% of $10,000) in this case, a balance transfer would still lead to significant saving.

Paying Off Balances With Promotional Rates

By law, credit card issuers are required to apply any payment more than the minimum payment to balances with the highest interest rate. Because of this, it's best to limit your credit card transactions to just one type—the one that gets the promotional rate—at least until your promotional rate expires. That way you can be sure your payment is going to the balance with the best interest rate.

To get the maximum value from your promotional rate, you should pay off your balance before the promo period expires. This is especially true if you've transferred a high interest rate balance from another credit card.

Pay attention to the fine print of your promotional offer, especially if you plan to mix balances. You may be required to pay your full balance if you make a new transaction that doesn't qualify for the promotional interest rate. For example, if you're carrying a balance transfer under a 0% promotional rate, making a purchase under the regular APR may require you to pay the full balance. Otherwise, you'll pay finance charges on any unpaid portion of your balance.

Beware High Post-Promotional APRs

Be prepared for your interest rate to increase significantly when the promotional rate expires. In fact, you should know what the post-promotional interest rate is going to be before you accept the offer. The regular APR may be a dealbreaker for the credit card, particularly if the promotional period is too short to pay off the balance you want to transfer or the purchase you're planning to make.

Zero Percent vs. Deferred Interest

Deferred interest financing plans are often promoted similarly to 0% introductory offers. The same "No interest" and "0%" phrasing often accompanies these offers. However, deferred interest is very different and not in a good way. With deferred interest financing, you must pay the full balance to avoid paying interest. If you have any balance left over after the promotional period ends, the full interest backdated to the first day of your balance is added to your account.

With a promotional APR, unpaid balance do not begin accruing interest until the promotional period ends.