Interest rates are among the most critical factors when choosing a credit card that can help you maintain financial stability. Credit cards come with an abundance of fees and rates, and it’s of utmost importance to keep track of them and, of course, pay them off on time.
Considering that the average American household has a credit card debt of $5,700 (US Census Bureau), reading your issuer’s fine print of the Pricing and Information is a must. Otherwise, you risk incurring more fees, damaging your credit score, and increasing interest rates.
Plenty of credit cards can help you make the most out of your card, but low interest doesn’t equal 0% interest. So, let’s take a closer look at what interest rates are, how they’re calculated, and when they’re charged, and see all the benefits that low-interest credit cards bring.
What is an Interest Rate?
Essentially, your credit card’s interest rates are the price you must pay to borrow money from your card issuer. Since credit cards are loans, your credit card issuer will, in most cases, require you to pay a fee for borrowing money. This fee is either an interest or annual percentage rate (APR). While interest rates and APRs are distinct charges with some financial products, they refer to the same with credit cards.
Most credit card issuers offer credit cards with variable interest rates, and the rate you’re charged depends mainly on your creditworthiness and credit score. You can expect to get more favorable interest rates if you have excellent credit. If you have poor credit, you’ll mostly encounter higher interest rates.
When are Interest Rates Charged?
Interest rates are charged only if you carry a balance on your credit card. If you consistently pay your credit card debts in full, you can benefit from a card with higher interest rates.
If you cannot always pay off your credit card debts on time, looking for low-interest credit cards is essential.
The average credit card interest rate is around 18%, but it can go up to over 30%, so looking for low-interest credit cards is probably your best choice.
Certain credit card issuers might offer a grace period to their cardholders. This period typically lasts from the end of the billing cycle to the next payment due date, during which time no interest will be charged on your new balance. You should check with your issuer to see if they have a grace period.
What are Credit Card Interest Rate Types?
Your credit card’s interest rates will always be included in your monthly statement, and you can always check the Schumer box to see all your fees and APRs. To avoid being unpleasantly surprised by your monthly statement, check the fees and APRs, even if you have low-interest cards. The most common types of APR that you will encounter are the following:
- Introductory APR. Some issuers offer introductory APR on purchases and balance transfers to new clients. This APR fee is typically very low in the first year as a cardholder, or it can even be 0%. The introductory APR is typically valid for the first year of using your card, and once this period is over, the normal rates will apply.
- Purchase APR. This is the interest rate you pay using your card for everyday purchases such as grocery shopping. Unless you’re using a low-interest credit card, your purchase APR will be between 8% and 25%, but it could go even higher, depending on your issuer and your credit score.
- Cash Advance APR. You will have to pay this interest rate for using an ATM to borrow money from your credit card. The rate depends on the issuer, but you can expect an average rate of about 25%.
- Balance Transfer APR. This is a charge for transferring your balance from one credit card to another. The average balance transfer APR is between 8% and 25%.
- Penalty APR. You can incur a penalty APR if you’re over 60 days late on making your payments. This is the highest APR you can encounter, and depending on the issuer, it can easily exceed 30%.
It’s important to note that you might still encounter other fees even if you have low-interest cards or a 0% introductory APR. Besides the interest rates, and depending on the type of credit card you’re using, you can expect to pay:
- Foreign transaction fees
- Balance transfer fees
- Currency conversion fees
- Cash advance fees
- Annual fees
You can avoid paying specific fees by taking out different types of credit cards, such as those with no annual fee offers or no foreign transaction fee.
Annual Percentage Rate vs Annual Fees
Annual fees are an entirely different concept than yearly percentage rates, yet they’re commonly confused for one another. Unless you have a no-annual-fee card, you will be charged an annual fee for your account maintenance. This fee has nothing to do with borrowing money or making purchases; it won’t be included in your APR, and even if you don’t use your credit card in a given year, you will still be charged an annual fee.
On the other hand, if you have a no-annual-fee card, this doesn’t mean you have a 0% annual percentage rate. APRs and yearly fees are charged separately. Certain issuers offer 0% introductory APR with their no annual fee cards. While you won’t have to pay the yearly fees here as long as you have the card, the 0% introductory APR is only valid for a limited period.
Fixed vs Variable Interest Rates
Regardless of the type of card you have, and whether it’s a low interest or not, you will encounter either a fixed or variable interest rate card. (Card Interest Explained)
- Variable Interest Rate. A variable APR changes with the prime rate. The prime rate is the base interest rate banks charge their most creditworthy clients. It’s typically about 3% higher than the Federal Funds Rate, and as the Federal Funds Rate rises or falls, so does the prime rate. The interest rate you’re offered will be the prime rate plus a margin. Most issuers provide variable APR cards; your margin will depend on your score and credit history.
- Fixed Interest Rate. A fixed APR still depends on the prime rate but doesn’t change as often. These rates are more predictable, but although their name would suggest otherwise, they’re still prone to changing. Your issuer can change their fixed APR anytime, but they must give you a notice beforehand.
The Pros and Cons of Low-Interest Offers
Low APR cards are rather unique. They’re primarily designed for those who have an excellent credit score, so most issuers will require you to have a score of 690 or even higher.
They often don’t come with many perks; their most significant advantage is the low interest rate. You can still collect points, get rewards, and even find a card with cash back, but you shouldn’t expect your rewards to be as high as on some other cards.
If you plan on making a large purchase on your card that will take you some time to pay off, or if you want to transfer your current high-interest balance, then low-interest offers are for you.
How Can You Avoid Paying High-interest Rates?
The only way to avoid paying high interest rates is to pay your debts in full and on time. You won’t have to pay interest rates if you don’t have a balance. However, if this is impossible, you should opt for a low APR card. If you have a good credit score, your low-interest card will offer you excellent rates, and you’ll likely be eligible for a 0% introductory APR – you might even get a card with no annual fees. If you have poor credit, you might still be able to apply for a low APR card, but you’ll likely have to pay for the annual fees.
Can You Avoid High Interest by Making Only Minimum Payments?
You’re still losing a lot of money on interest rates by making only the minimum monthly payments. The minimum payment amount is usually around 3% of your whole balance and will cover only the interest rate and a tiny part of your total balance. To reduce the accumulation of interest rates and your revolving credit utilization ratio, making more than the required minimum payments is in your best interest. Of course, making only the minimum payments is better than not paying your debts, as you will be charged late payment fees and risk increasing your interest rates.
Low-Interest Cards for Bad Credit
Although these offers are mainly for those with excellent credit scores, those with fair or poor credit can still find adequate cards with good interest rates. Just like the typical cards, the low-interest ones have a margin, and if you have bad credit, you should expect to pay a bit more for the APR, although it is still lower than the average. Your perks and rewards will also be limited if you have low credit. While those with excellent credit can find low APR offers with no annual fees, if you have a lower credit score or no credit history, you will usually have to pay the yearly fees.
Before applying for a low-interest card with poor credit, check the issuer’s requirements and see if you’re eligible for their card. Applying for multiple cards quickly will damage your credit score, so avoid this.
RELATED: How to Fix, Protect, and Grow your Score
If you need such a card but aren’t eligible for it, you can improve your credit score by:
- Lowering your credit utilization (don’t spend more than 30% of your credit limit)
- Paying off your debts on time
- Refraining from applying for multiple cards or loans
- Keeping your current credit accounts open
Bottom Line
Overall, these card offers can help you manage your finances and are an excellent choice for those who carry a balance or plan on making a large purchase and paying it off during the duration of their introductory APR.