How credit card promotional interest rates work

Thinking about making a major purchase like a new computer or a smart TV? You might’ve noticed that credit cards sometimes offer special promotional interest rates for those types of big-ticket items. The idea is that you buy the item with a credit card and don’t pay interest on your purchase during a specified promotional period—12 months, for example. 

Before you shop, it may help to know the different types of credit card promotional interest rates. You may also want to learn about the interest charge on promotional balances. Read on for information you can use when it’s time to make your big purchase.

Two major types of promotional interest rates are zero interest and deferred interest. 

As the Consumer Financial Protection Bureau (CFPB) cautions, “Though deferred interest and zero interest may seem similar, the differences can have big effects on your wallet.” 

Keep reading to learn more about both types of promotional interest rates.

With a zero-interest or 0% APR promotion, you won’t pay any credit card interest on your promotional purchases during the promotional period. When that time frame is over, the interest on any remaining unpaid balance starts to add up on the date the period ends. 

Here are things to keep in mind about zero-interest promotions:

Possible wording	You may see phrases like "0% intro APR for 12 months."
Key facts	Interest on any unpaid balance starts to add up on the day your promotional period ends. Introductory interest rates are required by law to last for at least six months. But as the CFPB explains, “If the introductory rate is variable, it can still change during the first six months if the index on which it is based (for example, the ‘prime rate’) changes.”
Terms & conditions	Some issuers require you to make monthly minimum payments on time in order to keep your promotional interest rate. If that’s the case with your card, this will be explained in your credit card’s disclosures.  You may need to make a minimum purchase to qualify for the offer. The promotional APR might not apply to some transactions—like cash advances or balance transfers, for example.

 

When you make a purchase with a deferred-interest promotion, your interest is deferred—in other words, it’s delayed. 

You won’t pay interest on a qualifying transaction until the end of the deferred-interest period. And when the period ends, the credit card’s standard interest rate will apply.

But the standard rate won’t apply to just the remaining balance—or any future balance, for that matter. As the CFPB explains, “If you do not pay off the entire balance of the promotional purchase you’ve made on your card, then interest going back to the date of the purchase will be added on top of the remaining balance.”

That means that if you don’t pay off your balance before the end of the promotional period, you’ll owe all the interest that was deferred—as well as the remaining balance.

The bottom line: If you don’t pay off your purchase during the promotional period, a deferred-interest promotion may cost you more money than a zero-interest promotion.

Here are some things to keep in mind about deferred-interest promotions:

Possible wording	You may see phrases like “No interest if paid in full in 12 months.”
Key facts	Interest is deferred until the end of the promotional period. If you don’t pay off your promotional balance before the end of the period, you’ll owe all the interest that was deferred—on top of the remaining balance. Introductory interest rates are required by law to last for at least six months. But as the CFPB explains, “If the introductory rate is variable, it can still change during the first six months if the index on which it is based (for example, the ‘prime rate’) changes.”
Terms & conditions	Some issuers require you to make monthly minimum payments on time in order to keep your promotional interest rate. If that’s the case with your card, this will be explained in your credit card’s disclosures.  You may need to make a minimum purchase to qualify for the offer.

 

Whichever type of credit card promotion you may go with—zero interest or deferred interest—keep these considerations from the CFPB in mind:

• Remember that you’re borrowing money, like with any other credit card. Keeping this in mind may be important if you want to avoid paying interest on your purchase.
• Know the start and end dates of your promotional period. Also be aware that things can sometimes happen to shorten the promotional period. There may also be fees—balance transfer fees, for instance—that apply to the promotional rate.
• Make more than the minimum payment every month if you can. Here’s why: The minimum payment is generally not enough to pay off your promotional balance before the promotional period ends. 
• Be aware your interest rate will jump after the promotional period ends. That’s because promotional interest rates are lower than the “everyday” rate on a credit card.
• Understand how other items you buy with your card could affect a deferred-interest promotion. According to the CFPB, “If you have other balances on the card that do not have deferred interest, any amount above your minimum payment will usually be applied to the balance with the higher interest rate.” If you’d like your extra payments to be applied to your promotional balance instead, contact your credit card company. Ask it to apply any payment above the minimum payment amount to your deferred-interest balance. But keep in mind that these requests aren’t always required to be honored by your card issuer.

Here are key takeaways from this article:

• Types of promotional interest rates: Two major types of promotional interest rates are zero interest and deferred interest. 
• Zero-interest promotions: With this type of promotion, you won’t pay any interest on your promotional purchase during the promotional period. When the period is over, your standard interest rate will apply. And you’ll be charged interest on any remaining unpaid balance starting on the date the promotional period ends. 
• Deferred-interest promotion: With this type of promotion, interest is deferred until the end of the promotional period. If you don’t pay off your promotional balance before the end of the period, you’ll owe all the interest that was deferred—on top of the remaining balance.

Now you can be better prepared to compare different types of promotional interest rates when you’re making your big purchase.