It’s hard to argue against the appeal of 0% interest credit cards. Transfer your balance from a high-interest card or drop a big purchase on the new card and, boom, no finance charges for a year or more!
But hold up. Zero interest doesn't mean zero debt, and it doesn't mean zero impact on your credit score. Here are four ways that new 0% card could actually ding your credit score.
1. Higher credit utilization
First off, it helps to understand how credit scores are calculated. The biggest factor in your FICO score — the scores most commonly used by lenders — is your payment history, worth 35% of your score. The second-most-important factor is credit utilization, or the percentage of your credit limit that is taken up by debt. Utilization accounts for 30% of your score.
Here’s where a big purchase or balance transfer on your new card can hurt. If you put $5,000 on a card with a $10,000 limit, your utilization on that card is 50%. Ideally, you want to keep utilization — on each card and across all cards — below 30%. Less than 10% is even better.
Nerd tip: When you transfer a balance to a new card, don’t close the old account. Keep it active with the occasional purchase. That keeps your overall credit utilization lower. It also helps with the portion of your credit score attributed to the length of your credit history. (That accounts for 15% in the FICO model.)
2. A new account
Bad news: When you apply for a new credit card, the issuer will run a credit check known as a "hard" inquiry. This has the effect of knocking some points off your credit score, at least temporarily, since it suggests you're looking to take on new debt. . of the new card includes a “hard inquiry” of your credit history, which signals you’re looking to take on new debt. Hard inquiries are included in the "new credit" factor that makes up 10% of your FICO score.
Good news: Over time, your score should recover, and a new card can eventually help your credit score by diversifying your credit profile. But try to keep your balances low and always — always — pay your bills on time.
3. More debt
OK, so you don’t have to pay interest for a while on new purchases. But you're still taking on new debt. Zero percent offers are great as tools to help in the short run, whether to temporarily cover a purchase or help double-down on paying off a high balance. But if undisciplined spending got you into debt trouble in the first place, then a zero interest card can be an avenue for even more damage. Handle with care.