What are interest free credit cards?

Borrowing usually comes with some form of baggage and, at the very least, you’ll need to afford the minimum monthly repayments. Worse, you could be stung by rocketing interest rates when the introductory offer runs out, or find yourself penalised if you breach the T&Cs of your agreement. Doing your homework first is the best way to get all of the benefit with the minimum bother.

We’ve got everything you need to know….

• What is an interest free credit card?
• How does an interest free credit card work?
• Are interest free credit cards a good idea?
• What are the dangers of interest free credit cards?
• How do I find the best interest free credit cards?

What is an interest free credit card?

Interest free credit cards let you borrow money (get credit) without being charged for the privilege (which is basically what the term ‘interest’ means). If you spend £100 on your card, you should only pay back £100, as long as you clear the balance within the interest-free period, meet minimum repayments and don’t go over your credit limit. Once the offer period ends, the standard interest rates will apply to the remaining balance of your card.

What can be slightly more confusing to get your head around are the different types of interest free credit cards. You’ll hear a lot of terms bandied around on websites, from rewards credit cards to prepaid credit cards (which actually don’t even exist in the UK!). Many are geared towards specific transactions, such as card purchases or balance transfers (moving debt from one place to another). Here are the three main ones you’re likely to come across:

• 0% purchase credit cards let you buy items upfront and pay off the amount you've spent over a set period of time without any interest. They can be useful, for example, to spread the cost of a holiday, furniture, gig tickets or an expensive appliance.
• Balance transfer cards, meanwhile, let you move debt from an existing card to one with a much lower introductory rate of interest, or even no interest at all for a certain period. Note that you may have to pay a balance transfer fee (which typically ranges from 3%–5% of the transfer amount), but some credit card companies will waive these.
• Money transfer cards are slightly different yet. They let you borrow money to pay directly into your bank account. They can help pay off something that isn’t on credit card, such as an overdraft, or be useful if you want to give yourself a 0% cash loan for a set period.

How does an interest free credit card work?

The 0% interest rate is only for a limited period of time. It usually starts from the day you open the credit card account or from the date you make your first transaction. Check the details of your offer thoroughly to find out which applies.

You might also have an ‘offer window’, which means the 0% interest period is only applicable on, say, balance transfers made up to the first 60 days from account opening. Transfers made after that date would be subject to a standard rate of interest.

In many cases, the 0% rate only applies to one main transaction type, such as balance transfers or card purchases. Using it for other things, such as withdrawing cash, could see you charged a higher rate of interest.

You could also disqualify yourself from the 0% rate if you fail to make your monthly minimum repayment on time or if you go over your card’s credit limit. When your 0% interest rate ends, you’ll pay the remaining balance on your card at the standard rate.

With some cards, the interest-free period only lasts for around three to six months. On others, it can go up to 30 months or more. Having a good credit score can improve your chances of securing a longer deal. There are other ways a credit report impacts credit card applications too, such as determining how much you are allowed to spend on it (your credit limit).

Are interest free credit cards a good idea?

They can be, especially if you’re looking to spread the cost of a big purchase or to consolidate and shift debt. They can help to simplify repayments and potentially give you more time to clear the debt. And, of course, they can be helpful when you need emergency funds.

But their advantages all hinge on whether you’re in a position to repay the debt before the interest-free period ends.

If you’re confident you can do this, a 0% interest credit card offers a number of benefits over, say, a standard personal loan.

Interest free credit cards v. personal loans

1. You can often choose to borrow smaller amounts with a credit card - even if you are given a big credit limit. With a personal loan, the lowest amount is usually £3,000 and the rates for this aren't as competitive as they are for larger sums.
2. Personal loans lock you into fixed monthly repayments whereas with a 0% interest credit card you can pay off anything from the bare minimum to the whole balance in one go.
3. Any money you pay back on your credit card can effectively be borrowed and spent again. This is what’s known as ‘revolving credit’. Loan repayments, however, are solely to repay the debt and can’t be accessed again.
4. In England, Scotland and Wales you’re offered greater consumer protection by buying on credit card – as long as the purchase costs over £100 and up to £30,000. Under Section 75 of the Consumer Credit Act, you will be able to claim your money back if the retailer goes bust or the goods you’ve bought are faulty, even if you’ve only put the deposit on credit card.
5. Some 0% interest cards, known as rewards credit cards, offer an incentive to use them by giving cash back, points, or travel miles for every pound you spend. There is sometimes a limit to how much you can ‘earn’, however.

Finally, note that both 0% credit cards and personal loans can help improve your credit score. As long as they’re used correctly (ie paid off consistently and on time) they can go some way to building a positive repayment history.

What are the dangers of interest free credit cards?

It can be tempting to view interest free credit cards as ‘free’ borrowing, but if you can’t meet the minimum repayments, or haven’t paid off your balance by the time your introductory offer ends, your bills will soon soar. To avoid some of the dangers, follow our MustCompare golden rules:

1. Don’t be tempted to spend more than you originally budgeted for, as you’ll quickly rack up bigger balances which can be difficult to pay off later. If you’re worried you won’t be disciplined, take the card out of your wallet.
2. If you’re not organised by nature, set up a direct debit from your account for the minimum repayment each month to make sure you aren’t hit by late or missed payment fees. 
3. Don’t lose track of how long you’ve got before the interest-free period ends – after this the interest rises to roughly 18 or 19%, which will make a significant impact on your monthly repayments. Set a reminder on your phone or in a diary.
4. Work out, realistically, how long it will take to pay off your balance. We always suggest paying as much as you can, as soon as you can, but it’s ok to spread the repayments out over the whole interest-free period too if that feels more comfortable financially. Just have a plan and keep to it.
5. A cash advance on credit card, such as withdrawing money from an ATM, is not a good idea. Firstly, there are costs associated with these sorts of transactions. Daily interest will likely apply from the day you make the withdrawal. In other words, the interest-free grace period will not apply. What’s more, the interest rates usually are higher than the rate you would pay for everyday purchases. Secondly, cash advance credit card use can show up on your credit report. This does not necessarily mean your credit score will be hurt, but what will particularly concern lenders is if multiple cash advances show up.
6. Watch out for deferred interest. This basically means that if you don’t pay off the entire balance of the card by the time your 0% period is over, then interest going back to the date of the purchase could be added on top of the remaining balance.

How do I find the best interest free credit cards?

First, decide which of the three main types of 0% interest credit card (0% purchase v. balance transfer v. money transfer) is best suited to your needs.

Note that some credit card providers offer both 0% interest on balance transfers and purchases. These combination cards can be difficult to keep on top of as the interest-free terms might be different for each purpose (for example, they might last different time periods). Read the small print carefully. It might be best to avoid these cards altogether if the point of the balance transfer is to make it easier to pay off your debt. Adding more to it – by using the 0% purchases offer – will make that necessarily harder.

Once you’ve established what type you want, you can compare credit cards in more detail by looking at three criteria specifically.

How to compare credit cards:

1. Zero interest period
   Check how long the 0% interest offer lasts. Those running the longest, and hence offering the most time to pay off your balance/lowest monthly repayments, are usually the most attractive.
2. Fees and charges
   Some of these may not matter if you’re only using the card for a very specific purpose. But if, for example, you want to take it on holiday abroad, avoid ones that apply foreign transaction fees.
3. The APR
   Understanding what APR means and how it affects you is important. Essentially, it is the rate you’ll be charged once the 0% interest period ends. Again, it doesn’t matter too much if you’re confident you’ll have paid off your balance by then, but if you want to continue using the card after the introductory deal has ended, go for the lowest APR.

If, all cards compared, there’s nothing much in it, look at other perks that providers are offering. The best credit cards on purchases, for example, may include rewards credit cards. These often offer both the 0% interest period as well as cash back, points or air miles every time you spend on them.

Other 0% purchase cards are geared towards borrowers with relatively low credit scores. Although these typically offer shorter 0% periods and lower credit limits, they might be worth investigating if you’ve got a poor financial history.

Finally, a word of warning: as with most financial products, the advertised deal may not reflect the one you end up getting. Often, interest free credit card deals will be promoted with a maximum 0% period, rather than a guaranteed period. Getting the best deal will depend on your credit history and lenders’ current deals.

Conclusion

Providing you are disciplined about repayments, 0% interest credit cards can be a really useful tool to get on top of existing debts or as an alternative to personal loans to spread the cost of big purchases. Clear your balance before the standard rate kicks in and it’s win-win.

Where 0% deals get more dangerous, however, is in tempting people to rack up bigger balances in the belief they won’t get charged for it. As our guide explained, missing repayments, failing to clear your balance by the end of the promotional period or forfeiting the deal by using the card for cash advances are just some of the ways you might be stung and struggle to stay on top of the debt.

Borrowing money: a complete guide to doing it responsibly has further tips on what to be aware of before taking the plunge. 

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