Got credit card debt? Want to pay it off? Oddly enough, another credit card might just be your best bet.
It’s one of the stranger ironies in personal finance: Credit cards carry some of the highest interest rates in the lending industry. They also offer some of the lowest rates in the business – as in, no interest at all.
The 0% APR credit card can be a powerful tool for paying down debt. It allows a consumer to make purchases, balance transfers, or both, and pay no interest for a promotional period of 12, 18 or even 24 months.
Let’s say you have a credit card with a $5,000 balance and a 20% interest rate. Even with payments of $300 a month, you’ll spend 20 months paying off the balance, along with $906 in interest. And that scenario assumes you never use the card again.
With a zero-interest credit card, however, the math flips to your favor.
Let’s say you transfer the $5,000 balance to a zero-interest card with an 18-month promotional period, paying a onetime fee of $150. Now, with the same $300 payments, you can retire the debt in 17 months, paying no interest.
“It’s really hard to beat 0% interest, if you’re able to do it,” said Sara Rathner, credit cards expert at NerdWallet.
The zero-interest card is not for everyone. People with weaker credit who apply for one may meet with rejection, or be offered a card with a vanishingly low credit limit. If your credit score is below 690, NerdWallet estimates, you won’t qualify for most 0% APR promotions.
Using a 0% APR credit card requires discipline
And the proper use of a zero-interest card requires discipline: If you load it up with new charges, even an interest-free card can become a burden on your balance sheet.
“Regardless of what kind of card you choose, using it responsibly is key,” said Courtney Alev, a consumer financial advocate at Intuit Credit Karma.
Used carefully, a zero-interest credit card can save a consumer hundreds of dollars in interest on other loans: Not just credit card balances, but home equity lines, auto loans, student loans, personal loans and so on. If you have a loan with an interest rate greater than zero, credit experts say, you can probably save money by transferring the balance to a zero-interest card.
And zero-APR cards are good for more than balance transfers. For a consumer who wants to renovate a bathroom or replace a water heater, a zero-APR card can function as an interest-free loan, provided you repay the balance before the promotion expires.
Many consumer finance sites offer curated lists of zero-interest cards, including NerdWallet, Credit Karma, Bankrate and Motley Fool.
Here are six features to compare and consider in a zero-interest card.
Zero-interest promotional period
Competitive zero-interest cards generally spare the cardholder from interest for 15, 18 or 21 months. A few cards charge no interest for 24 months.
“Longer is definitely better,” said Joel O’Leary, personal finance writer at Motley Fool Money.
A longer promotional span potentially allows you to transfer more debt to the card, because you’ll have more time to pay it off.
The average consumer with credit card debt owes $6,371, Bankrate reports. That sounds daunting.
But if you transfer that balance to a zero-interest card and divide it into 24 interest-free installments, “it works out to $265 a month,” said Ted Rossman, senior industry analyst at Bankrate.
Balance transfer period
Once you’ve received a zero-interest credit card, you typically have only two to four months to make balance transfers from other loans, Rossman said.
The big risk is running out of time to complete a balance transfer. So, a longer transfer period is better.
Balance transfer fee
No: Your zero-interest card is not entirely free. You typically pay a small fee to transfer debt onto the card. It often ranges from 3% to 5% of the balance. Some cards charge no fee.
If you transfer $5,000 onto a zero-interest card and pay a 5% fee, you’re out $250. But that amount pales next to the interest you save after the transfer, said Rathner of NerdWallet.
“If the fee you’ll pay is lower than the amount of interest you’ll save, then you’re coming out on top,” she said.
Annual fee
If you choose a zero-interest credit card on one of the personal finance sites listed above, you can probably avoid an annual fee.
“Annual fees are not very common in the balance-transfer space, which is a good thing,” Rossman said.
Credit limit
Here lies one of the most irksome imponderables in the world of zero-interest credit cards: In many cases, you don’t know how much credit you will get until you apply.
Your credit limit on a zero-interest card might range from $1,500 to $10,000 or more, depending on your credit score and other factors.
And you don’t typically learn how much credit the card company will extend until you complete an application.
“I think this is probably the most frustrating thing, from the consumer’s experience,” said Alev of Credit Karma.
Also, your application triggers a “hard inquiry” on your credit report, “which hurts your credit score,” Alev said.
Fortunately, some credit card companies now offer “pre-qualification,” allowing consumers to get an estimate of their credit limit without a formal application and credit inquiry.
“I think this is so consumer-friendly,” Rathner said.
Post-promotion interest rate
Obviously, with a zero-interest credit card, you want to pay off the balance before the promotional rate expires.
But only about half of consumers manage to do that, said Rossman of Bankrate.
If you still have debt on the card when the 0% interest ends, you almost certainly face double-digit interest on any balance that remains.
Unfortunately, it’s hard to tell ahead of time what that post-promotion interest rate will be. It’s generally stated as a range between about 18% and 29%. And the rate on most cards is variable.
“The goal is to pay it off, so that the variable rate never kicks in,” said O’Leary of Motley Fool.
This article originally appeared on USA TODAY: Got credit card debt? The best tool to pay it off might surprise you.
