What is an Interest Free Credit Card?
If you want to pay less for the cost of borrowing, you could try searching out an interest free credit card deal. But beware, not all interest free credit cards are created equal, nor are they available to everyone.
With some cards geared towards spending and others set up to save you cash on existing debts, if you’re interested in getting the best out of paying the least, you should seek out some knowledge to help you in your quest. Step inside the cave of enlightenment, where we will unravel the intricacies and illuminate the benefits and potential pitfalls of credit cards that are ‘interest free’.
How interest free credit cards work
When we talk about ‘interest free’ credit cards, we’re referring to the APR or annual rate of interest that you pay on the money you borrow. In truth, all credit card borrowing is interest free if you clear the balance in full before your payment due date.
So, providing there are no other credit card fees and charges associated with your spending, you won’t pay extra for paying on plastic. Interest free credit cards offer an interest free period – usually from a few months up to several years, depending on the type of card and the product.
Most balance and money transfer cards will however come with a transfer fee, usually anything up to 4% of the overall balance. So even if you pay everything off within the interest free period, bear in mind you would be subject to the transfer fee. The transfer fee is usually added to the balance at the start of the agreement.
This means that even if you only make the minimum payment every month, you’ll still pay zero interest on your borrowing. You do need to make at least those minimum payments though. Fail to do so and you’ll be landed with unwanted penalty fees, and you could lose your super-attractive introductory rate too.
3 main types of interest free credit card:
- Interest free purchase cards
- Interest free balance transfer cards
- Interest free money transfer cards
Luckily for you, we’ve got guides to explain each of these in more detail here at Money Guru, so make sure you peruse these at your leisure to pack in maximum knowledge expansion.
A summary of interest free credit cards
- Purchase cards are for use when you want to spend and spread the cost of a project or perhaps a big ticket purchase.
- An interest free balance transfer card allows you to transfer outstanding debts from other credit cards and store cards to clear them without interest mounting.
- An interest free money transfer card allows you to move money straight into your bank account – perhaps to clear an overdraft or be used to buy something that can’t be purchased on a credit card. If you take out a balance or money transfer card, a transfer fee will usually be applied to the amount of money you move and added to your balance.
Some select card providers may offer deals that include interest free purchase and balance transfer periods. But on the whole, doing something that your card is not intended for – such as making purchases on a balance transfer card – will usually see you charged at a much higher rate. Withdrawing cash from an ATM with any of these types of cards is an expensive no-go that could cause your credit rating to lose serious sparkle too.
Higher interest rates
Once your introductory period ends, a much higher rate on interest will generally kick in. These usually sit around the mid to late-teens interest rate wise, but do vary. If you bag an extended period of interest free spending or transfer, it’s easy to become too cosy and put off paying off your debt.
However, just paying one or two months at the higher rate of interest could wipe out the savings you make by taking out an interest free deal, so just like trekking up Everest, servicing this type of credit card is all about commitment to the end goal.
To ensure your balance is clear before your special interest free rate disappears, treat your credit card borrowing as a loan. Then calculate the fixed amount you’ll need to pay each month to clear the debt. If you spend more on your purchase card, adjust your payment accordingly and never spend more than you can afford to pay back in the allotted time.
Balance transfer options
You should always aim to push that balance back down to zero. However, if you’re nearing the end of your interest free period and you’re unable to clear it fully, it’s wise to look around for a balance transfer option at a lower interest rate to see if it could work out cheaper for you.
A repayment calculator is your friend should you need to do this. Just enter your balance and current and potential interest rates along with any charges and it’ll work out your cheapest option. With credit card deals changing all of the time, it’s not always smart to rely on a better option being available.
Those who want to reap the benefits of interest free fully will set up a direct debit to pay their calculated fix sum off their card each month, guaranteeing that they reach their goal.
Not sure an interest-free credit card is for you? See our guides to understanding credit cards, which credit card is best for me or find alternatives to credit cards here.
Compare interest free credit cards
The super-shiny, most attractive and seriously extended interest-free credit card deals are naturally reserved for those with great credit scores. If that doesn’t sound like you, shorter introductory periods or slightly higher interest free rate cards could still be open to you.
Many interest free cards are advertised as having zero periods ‘up to’ a certain number of months, so if you’re accepted for the card, your lender may decide to offer you a different deal. Regulation requires that at least 51% of those accepted for cards will get the advertised representative rate. That means that up to 49% of applicants will receive a different rate, which may be higher or lower, depending on their credit standing and the type of product they have applied for. Though in the case of some interest free cards you may find you’re accepted for the card, or rejected without being offered a different rate, so it’s important to check you fit all the criteria before applying.
In summary, apply for an interest free credit card and you might get offered a different APR, interest free period or even a higher transfer fee than those advertised. There are steps you can take to avoid rejection though...
Fire your details and desires into our MoneyMatcher tool and we’ll conjure up products tailored to your requirements and highlight deals you’re more likely to be accepted for. This path is preferable to pinging applications out at different providers, which can make you seem desperate and hurt your credit score.
Our MoneyMatcher is designed to make it easy to compare the overall cost of borrowing with different products and highlights card charges and features you might find useful too. Isn’t it time you fired it up?