Since credit-card interest rates are the highest that most people face, low interest credit cards sound very attractive to consumers. However, people need to remember that lending institutions are offering these cards to make money, and they are not always the right choice. The following guide explains how these cards work while offering advice on finding the best low interest card, if one is, in fact, the way to go.
Credit-card interest rates
The interest rate on a credit card is given at its APR (annual percentage rate). As high as these generally are in comparison to other rates, the effective rate can actually be higher since interest is compounded daily. This method of computing rates, knowing as the average daily balance, is the most common way that credit card companies compute interest. This and the other methods companies typically use, previous balance and adjusted balance, are explained in how credit cards work. Look at how the company computes rates and the net effect this will have on overall costs (which will vary with the user) when deciding on a card.
Low interest credit cards are not always the best choice
With rates the way they are, many people naturally assume that they will be best off with low APR credit cards. However, this is not true for everyone. Since most cards have a period of 55 days in which no interest will be charged if the balance is paid in full, the interest rate is not important to those who do not carry anything forward to the next billing cycle.
While it may seem like a good idea to have a card with low interest rates regardless, this is often not always the case. When a credit card offers a benefit such as a low APR, it is likely that other potential bonuses will be reduced. Although some low-interest credit cards have incentives to include points that can be used toward the purchase of products, they will not offer as much back as some dedicated rewards cards. For example, cash back credit cards are great deals for anyone who can pay their credit card off every month. For those that travel a lot, frequent flier credit cards or travel credit cards may be the way to go.
Balance transfer credit cards
The goals of low interest credit cards and balance transfer credit cards should not be confused. Balance transfer credit cards are best for those who already have a lot of credit card debt. They offer people low interest rates, sometimes 0% APR, for a limited period of time. If they are combined with a plan to pay off credit card debt, and the savings in interest will be more than the balance transfer fees this type of card incurs, they can be a way to save money and get out of debt. However, once the introductory interest rate period has expired, the rates charged by this type of card are likely to be higher than low interest credit cards, although it may be possible to combine both features into a single card.
What to look for in low interest credit cards
Getting a low-interest credit card is not always an option for those who often carry balances on their cards and decide that one is in their best interest. They are generally only offered to those with higher credit scores who present the least risk to companies. For people who do qualify, there are different things to look for:
- Annual fee: Most low interest credit cards will not have an annual fee. Find one without a fee and save on this needless expense every year.
- Other fees: ATM and other fees can add up quickly depending on how the card is used and should be looked at carefully.
- Interest rates and how they apply: Just comparing the interest rates between cards will not tell the whole story. Lenders will charge different rates depending on the type of transaction, and the advertised rate will be the lowest. Consider these rates if the card will be used for cash withdrawals or other transactions that will fall under these rates.
- Rewards programs and extra features: While these programs will not be as generous as dedicated rewards cards, they can offer nice bonuses that should be sought after. In addition, look at extra features to include car insurance.
- Foreign transaction fees: Charges made while traveling or purchasing from a foreign website will typically have a 1% fee added to the purchase price. Cards that charge high foreign transaction fees should be avoided by those doing a lot of traveling.
In the end, finding the right credit card, be it low interest or not, is all about matching one’s individual goals and usage patterns to a card that will best serve those needs.