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.
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.