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How to Calculate the True Interest Cost of a 0% Credit Card

Credit Card Basics, Credit Cards
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calculate true costs of zero interest credit card

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If you’re deciding between zero-interest credit card offers, it can be difficult to know what to focus on: the one with the longest 0% APR period, the one with a lower ongoing interest rate, or one that’s somewhere in the middle.

To help you compare intro APR offers, we’ve developed a measurement called “true interest cost.” It takes into account both the length of the 0% APR period and the ongoing rate, as well as how you plan to use the card, to make the best recommendation possible.

What does “true interest” mean?

We believe that the best way to compare low-interest cards is to average out the interest rate you’ll pay over the lifetime of the card (or, if you prefer, the length of time you’ll carry a balance). That way, someone who will have the card (or carry a balance) for just a short time will see cards with long 0% APR periods, while someone who’s going to be in it for the long haul will probably see cards with lower ongoing rates, even if they have shorter or no introductory rates.

» MORE: How is credit card interest calculated?

Our formula

Here’s how we calculate the true interest cost on our low interest credit card comparison tool:

True Interest Credit Card Cost Calculation

Let’s compare two cards:  Card A, which has a 12-month introductory period and a 15% ongoing APR; and Card B, which has no introductory APR period but has an 8% ongoing APR.

Alice is planning to make a big purchase and thinks she can pay it off within two years. After that, she doesn’t think she’ll carry a balance on her card. Her true interest cost for Card A would be 7.5% and her cost for Card B would be 8%. Card A would be a better option for Alice.

Bob, on the other hand, is planning to use his card for a long time. He usually carries a balance and doesn’t see that changing in the next four years. His true interest cost for Card A would be 11.25% and his cost for Card B would still be 8%. Because he’s keeping the card for a longer period of time, he’s better off with Card B.

Calculating your own true interest cost with our comparison tool

Here’s how to use our low-interest credit card finder to calculate your own true interest cost.

  1. Head to our comparison tool.
  2. Click on the  symbol next to the “True Interest Cost” column.
  3. Under the “Customize & Recalculate” header, move the slider to reflect however long you plan to carry a balance on the card (the default is two years).
  4. Hit “Recalculate” to refresh your results.

Where does the forumula fall short?

Unfortunately, the true interest cost isn’t a perfect measure. One important caveat is that if you’re paying off credit card debt, the interest rate is most influential early on, because the outstanding balance is higher. If you’re paying off a $10,000 debt, a 15% interest rate will matter much more early on than if it kicks in later, when your debt’s nearly paid off. If you’re using your low interest card to pay off a big purchase rather than for a steady amount of debt, our calculator will understate the value of 0% interest cards.

Another consideration is that you may decide to transfer your balance when the zero-interest period ends. In that case, you’d want to go for the longest 0% APR period you can.

Finally, you may plan to pay off your debt within a certain timeframe but be unable to do so. In that case, a card with a lower ongoing rate might be better than a card with a 0% period but a higher ongoing rate.


Image via iStock.