Younger Americans may be taking on long-term credit risk to help deal with rising costs.
As credit card debt balances reach record highs, recent FICO data shows that Gen Z is opening credit cards at a higher rate than other generations. They also have among the highest credit card utilization.
Amid job loss or reduced income, 48% of Gen Z relied on credit cards to make ends meet, FICO vice president Jenelle Dito recently told Yahoo Finance, and nearly 40% of Gen Z admits to opening credit cards as a financial cushion. But racking up credit card debt balances to meet monthly expenses can have lasting consequences and costs.
For some, credit cards with introductory 0% APRs offer a solution. You can use a 0% APR card to pay down an existing credit card balance — or to help make ends meet by avoiding interest on new purchases for a year or more.
However, these cards aren’t free money. When you reach the end of your 0% APR card’s intro period, you’ll also take on interest charges. Here’s what you can do to make the most of your 0% APR period and reduce incoming interest payments.
There are two primary ways you can use a 0% APR card: to transfer an existing balance and pay off debt, or to make new purchases throughout the intro period.
If you’ve taken on credit card debt to help with your expenses in the past, a 0% APR balance transfer can be a great tool. You can transfer the balance from your old card and use the intro period to pay down the principal balance without accruing more interest.
Generally, 0% APR periods today last from around 12 months up to as long as 21 months. That gives you a year or longer to pay down existing debt using a balance transfer.
Here are a few top 0% APR credit cards today. These cards offer introductory 0% APR offers on both balance transfers and new purchases:
But if you’re struggling to meet your expenses, a 0% APR offer alone won’t solve the problem, says Zach Reyes, CFP, founder and financial planner at Circadia Financial Planning.
“It has to be combined with solid cash flow planning,” he said. If your cash flow isn’t enough to pay down your balance before the end of the 0% APR period, you’re “probably just kicking the can down the road.”
After your 0% APR introductory period ends, any remaining balance will start to accrue interest. Average credit card APRs today are over 21%, according to Federal Reserve data. With interest rates that high, your balance will quickly grow after the intro period.
For example, say you have $2,000 remaining on your credit card after the intro period ends, and your ongoing interest rate is 21%.
If you only make minimum payments toward the balance (calculated at 1% plus interest), it would take over 15 years to pay down the balance in full, and you would pay over $2,800 in interest — and that’s assuming you don’t add to your balance over the payoff period.
If, instead, you decided to dedicate a fixed amount of $150 toward your balance every month, you’d have a much shorter payoff period of 16 months. But you’d still add nearly $300 in interest payments to your total amount paid.
The best way to avoid paying extra interest on your debt is to pay it down in full before your 0% APR period ends.
If you’re transferring a balance, have a plan before you open your new card. Figure out exactly how much you’ll need to pay each month over the intro period to pay down the complete balance (including any balance transfer fees) by the time your intro period ends.
Even if that amount is beyond your budget, dedicate as much extra cash as you can throughout the intro period to reduce your balance as much as possible before interest kicks in.
Whether you’re using the 0% APR for new purchases or a balance transfer, take stock of your remaining debt near the end of the period.
“Sixty days before the end of the 0% APR period, you should begin considering next steps,” Reyes said. “Don’t scramble in the final week of the promo before the standard APR kicks in. If you can pay off the remaining balance before the end of the 0% APR period, keep going and accelerate if possible. If there is going to be a meaningful balance left, this is the time to evaluate your next move.”
If you know you’ll still have debt when the 0% APR period ends, have a plan to tackle it before you start accruing interest. Taking action quickly can help you avoid mounting high-interest charges that lead to longer-lasting balances.
If you do nothing, your balance will start to accrue interest. Interest will make your balance grow, but depending on your balance, you may want to continue making payments toward your card until you pay the debt in full.
The more you can pay over the minimum payment each month, the faster you’ll bring down the balance. It can also be useful to switch to cash and debit payments until your debt is paid off, so you don’t risk adding to the overall balance.
A personal loan is another option for managing your debt, with a fixed repayment term and fixed monthly payments. Personal loans may offer more manageable payments if the payment required to eliminate your debt within the 0% APR period was beyond your budget.
Personal loans also generally have lower interest rates than credit cards. The average 24-month personal loan rate today is 11.4%, according to Federal Reserve data. However, the exact rate you qualify for will depend a lot on your credit score and other factors in your application. You’re more likely to get a lower interest rate with a great credit score.
Read more: How to use a personal loan to pay down $10,000 in credit card debt
In some cases, it could make sense to take on another 0% APR offer after your first one ends. This requires a solid credit score, and you’ll have to pay an additional balance transfer fee to move your existing balance to the new card.
However, this isn’t the solution for everyone. Consider your overall financial situation — and why you couldn’t pay down the debt throughout the first intro period — before you take on a new 0% APR card.
“This option is best when the personal loan is not an option, you have your cash flow plan under control, and life throws you a curveball that prevents the payoff during the initial balance transfer,” Reyes said. If you find yourself needing to transfer to a new 0% APR card repeatedly, he added, the solution is probably more about managing your cash flow rather than an additional balance transfer.
