If you borrow money with an interest-free credit card, then you won't pay interest on your purchases for an agreed amount of time. For example, you could be offered 12 months interest-free, or 24 months interest-free. The maximum interest free period offered these days by any card is 29 months.
Having a 0% credit card could save you a lot of money in interest. It can also be a good way to spread the cost of purchases. But be aware that they have to be used with care, or they could still leave you out of pocket.
What should I use my interest-free credit card for?
If you've got an interest-free credit card, it can be easy for your spending to spiral out of control. It's important that you don't let this happen.
Interest-free credit cards work best when you get them for a specific, planned purchase. They're best used for larger purchases, rather than everyday spending. For example, you might need new dining furniture. Ideally, you'd only borrow what you're spending on that furniture, and then you'd pay it back before the 0% period ends. You could also do the same for purchasing a holiday.
If you fall into the trap of using your 0% credit card to supplement your income, or to frivolously overspend, you could find your debt spiralling.
How to select the best interest-free credit card
Lenders are always under great pressure to attract new customers. This has led to many companies offering attractive interest-free credit card deals.
It's a growing trend, and some lenders offer extended interest-free deals. For example, you could get an interest-free credit card deal lasting 12 or 24 months. That could mean any purchases you make won't attract interest until your introductory rate expires after 12 or 24 months.
There are lots of benefits to be had for savvy customers. For example, if you pick a 12 months interest free credit card, you'll have a year in which to settle your debts without incurring interest.
Who qualifies for an interest free credit card?
As the old saying goes – ‘if it sounds too good to be true, it probably is' – and interest-free credit cards are no different.
You might find that you don't qualify due to your circumstances. For example, finding an interest-free credit card with bad credit can be particularly difficult.
Interest-free credit cards tend to be used to attract what lenders call ‘prime customers'. A ‘prime customer' is one with a good income and good credit rating.
If you're struggling to find one that will accept someone with your credit history, you should try shopping around. By using our advanced search option, you can filter the cards you're looking at. For example, you can search by interest-free and poor credit.
You could also find that some cards come with restrictions based on your regular income. So, while an interest free credit card for 18 months might look great, the small print might require a high monthly income. For example, it might require you to earn at least £1,000/month. You'll have to supply proof of your regular income before they'll consider your application.
It's always worth checking the small print before you apply for any credit card. You don't want to waste time applying for cards that you're not suited for. Plus, every application you do leaves a footprint on your credit record. If you do a lot of applications in a short period of time can, this can look like you were desperate for credit. This isn't appealing to potential lenders as it suggests you're not good with your finances.
Is an interest-free credit card the cheapest way to borrow money?
An interest-free credit card certainly can be the cheapest way to borrow money. But this relies on you being organised and committed enough to making your repayments as agreed.
Don't forget that you'll also have a credit limit on a credit card. So, if you need to borrow more than your credit limit allows, an interest-free credit card might not work for you.
How do interest-free credit cards make money?
This is an important question. The idea that interest free credit card deals are so common and readily available might strike you as surprising. With so many 0% deals lasting for so long, how on earth do the lenders make any money?
Be assured that credit card companies are no fools. Even though they make no money through interest on these 0% credit card deals, they find ways to make their money back.
For example, if you don't pay off the full balance before the interest-free period ends, you'll then start to pay interest. As soon as your interest-free period is over, interest rates on these cards can suddenly become high. You'll be charged these uncompetitive rates until you pay the balance off. It always pays to be organised enough to either pay off your balance, or switch to another deal, before the interest-free deal comes to an end.
You should also be aware that, if you miss the minimum payments, you'll often face charges from the lender. First of all, you'll be slapped with a punitive fee. Then, you could also find your zero percent deal revoked, meaning you'll end up facing hefty interest charges as well. The credit company will say that you're not as squeaky clean as you claimed to be and will put you back on the full rate. So, if you get an interest-free credit card, you should always make sure you make your repayments on time.
Finally, you shouldn't withdraw cash from your 0% credit card. You'll often find that you'll have to pay interest from the day you take out the cash, until it's paid off. Check the small print carefully.
You should also check whether balance transfers onto the 0% card are ok during the 0% period. You could get charged a fee or interest.
So, when it comes to zero percent credit cards, the house always wins. That said, if you manage your card and payments efficiently, there's no reason why you can't find a deal that works very well for you.
For more information on 0% interest free credit cards, use our handy comparison tables.
What are the pros and cons of an interest-free credit card?
As with anything, interest-free credit cards come with pros and cons.
You can borrow without paying any interest at all, if you use the card smartly and pay it off in time.
You can spread the cost of a large purchase.
You can get protection on purchases between £100 and £30,000 with most credit cards.
You could get into debt if you don't pay it off before the 0% period ends, because the interest rate on the card will increase significantly.
You'll be subject to a credit limit, so you can't always borrow as much as you'd like to.
If you miss repayments, you could lose your 0% benefit, or you could be charged a fee.
It can be tempting to start making frivolous purchases during your 0% period, but this could land you in unnecessary debt.