3129: What Does Zero Percent APR Really Mean? by Jamie Cattanach on Wealth Building Habits

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[00:00:30] This is Optimal Finance Daily. What Does Zero Percent APR Really Mean? By Jamie Cattanach with MoneyMiniBlog.com Maybe you're at the mall, tempted by a pair of killer new knee highs. Or maybe you're at your kitchen counter, flipping idly through the mail. In either scenario, the same scene unfolds. You see an offer for a new credit card making all sorts of outlandish promises.

[00:00:57] A quick and easy way to get what you want right now. Chief among the laundry list of enticements is the following phrase, printed in bold toward the center of the ad copy. Zero percent APR. You vaguely understand that this means you don't have to pay interest, but not much else. The pretty couple on the flyer is all smiles, enjoying a casual walk on some beach where billowing white linen is apparently standard uniform.

[00:01:26] I mean, why would you not sign up immediately? It's basically free money, right? Not exactly. Here's what you need to know before you sign up for that great looking credit deal. How does credit card interest work? Let's start at the beginning. What exactly does APR mean? APR stands for annual percentage rate, which is the figure the card company uses to compute your interest.

[00:01:53] It's the percentage you pay the lender for the money you borrow over the course of one year. For instance, if your loan has a 10% APR and you borrow $100, by the end of the year, you'll owe the bank $110, $10 of which is pure interest. Of course, depending on your card's specific terms, you may also be subject to other fees and charges like late payment penalties and annual dues.

[00:02:19] That 0% APR offer means the card charges no interest, but it's almost always a temporary deal. Check out the fine print. It's 0% APR for a set amount of time, perhaps six months or a year. Six months or a year is plenty long enough to rack up tons of debt on that credit card, all while promising yourself you'll pay it off later.

[00:02:44] Then, later comes, and guess what? You still don't have a spare $1,500 just laying around to pay it off with. And now that debt is accruing interest. Fast. Many entry-level cards carry APRs of 20% or even higher. Your revolving balance is suddenly growing, making it even more difficult to pay it down. Suddenly, you're stuck in the vicious vortex of credit card debt like so many other Americans,

[00:03:11] essentially paying extra for everything you purchase. What to know before you sign up. So, what's a savvy saver to do when confronted by that attractive credit card offer? Well, first of all, know exactly what you're getting into. Read the fine print before you sign up so you'll know when the promotional period is over. A three-figure interest charge is no one's idea of a fun surprise.

[00:03:38] It's always best not to spend money you don't have anyway. So, if you want to open that new line of credit, just pretend it does accrue interest and pay it off in full every month regardless. That way, you won't get hit by a huge deferred interest charge when the promotional period inevitably flies by. If you're in an absolute pinch and need a little extra to make ends meet, a 0% APR card can be a better option than a personal or payday loan, which usually start accruing interest immediately,

[00:04:08] as long as you make sure you prioritize paying it off as soon as humanly possible. It's very easy to forget to do so once you finally get your paycheck, especially since you know you can get away without interest for a few more months, which is exactly the trap you don't want to fall into. You could also look for a credit line offering incentives beyond a simple 0% APR promotional period. Some credit companies will even pay you cash money at sign-up,

[00:04:36] which is way better than an interest break if you ask me. Finally, if you fell victim to the 0% APR trap and are in debt already, take heart. This is one financial mistake it's totally possible to fix. It's even easier if you can find ways to earn more cash to put towards your goal, like taking up a side gig. Just don't be tempted to spend it on anything but paying down your debt. Don't give up on credit cards altogether.

[00:05:04] When used responsibly, credit cards can be a fantastic financial tool. They can help put your money to work for you, and yes, even land you on some fabulous-looking beach wearing white well after Labor Day, or those new boots. Just don't forget, credit card companies are running a business, and they're banking on you going into debt to earn their keep. Don't be afraid to take advantage of their offers while avoiding putting extra money in their pockets.

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[00:07:56] Performance not guaranteed. I think Jamie offers some great words of caution here about credit cards. If you have a tendency to overspend, it doesn't really matter what the credit card offer is. It's best to steer clear of credit cards until you can get your spending under control. But if you have a habit of living within your means, the world of optimizing credit card points can be pretty fascinating. I know people who have tons of labeled cards in their wallet,

[00:08:25] where they'll use one for gas and a different one for groceries. They spend a lot of time and energy figuring out the best way to optimize, where to transfer the points for the most value, etc., etc. It almost has the flavor of extreme couponing. Sure, they're saving a ton of money, but I suspect the thrill of the game is more satisfying for them. While I adore credit card points, I am nowhere close to optimizing at that level, and I still get tons of benefits.

[00:08:56] I personally don't feel the points I earn on day-to-day expenses are worth the trouble, because my day-to-day spending is super low. So I've always focused on cards with signing bonuses, and I open them at the time that I know I have a large purchase coming up. As it's more likely I'll meet the minimum spending requirement. I personally focus on credit card churning, where I open a card, spend just enough to earn the signing bonus, and then move on to the next card that has a good signing bonus at the time.

[00:09:26] So I'm only ever spending on one card at a time. It makes it so much easier to track my spending as well. Now keep in mind that I only started having fun with credit cards in this way after I got completely out of debt and overcame any temptation to overspend. This only works out favorably for me, because I am 100% committed to never carrying a credit card balance again. That'll do it for today. Thank you for listening. Have a great rest of your day,

[00:09:54] and I'll see you on tomorrow's show, where your optimal life awaits.