When it comes to choosing a credit card that can help you maintain financial stability, one of the most important factors to consider is the interest rates. 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 how the average American household has a credit card debt of $5,700 (US Census Bureau), reading the fine print of the Pricing and Information from your issuer is a must, otherwise, you risk incurring more fees, damaging your credit score, and increasing your interest rates.
There are plenty of credit cards that 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 exactly 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 that you have to pay for borrowing 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 known either as an interest rate or as an annual percentage rate (APR). While with some financial products, interest rates and APRs are distinct charges, they both refer to the same thing with credit cards.
Most credit card issuers offer credit cards with variable interest rates, and the rate you’re charged depends mostly on your creditworthiness and your credit score. If you have excellent credit, you can expect to get more favorable interest rates. 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 always 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, it’s important to look for low-interest credit cards.
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 is a period of time, typically from the end of the billing cycle to your next payment due date, when no interest will be charged on your new balance. You should check with your issuer whether 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, you should also 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 will either be 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 an interest rate that you pay for using your card for your everyday purchases such as grocery shopping. Unless you’re using a low-interest credit card, you can expect your purchase APR to be between 8% and 25%, but it could go even higher, depending on your issuer and your credit score.
- Cash Advance APR. This is the interest rate that you will have to pay 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 that you can encounter, and depending on the issuer, it can easily go over 30%.
It’s important to note that even if you have low-interest cards, or currently have a 0% introductory APR, you might still encounter other fees. 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 go around paying certain fees by taking out different types of credit cards such as no annual fee offers, or with no foreign transaction fee ones.
Annual Percentage Rate vs Annual Fees
Annual fees are an entirely different concept than annual 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 at all 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 that you have a 0% annual percentage rate. APRs and annual fees are charged separately from one another. Certain issuers offer 0% introductory APR with their no annual fee cards. While you won’t have to pay the annual fees here as long as you have the card, the 0% introductory APR is only valid for a limited period of time.
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 interest rate or a 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 that 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 offer the variable APR cards, and 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 at any given time, but they’re required to 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, as their biggest advantage is the low interest rates. 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’re planning 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 off your debts in full and on time. If you don’t carry a balance, you won’t have to pay any interest rates. 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?
By making only the minimum monthly payments, you’re still losing a lot of money on interest rates. The amount of minimum payment is usually around 3% of your whole balance and will cover only the interest rate and just a small part of your total balance. To reduce the accumulation of interest rates, and your revolving credit utilization ratio, it’s in your best interest to make more than the required minimum payments. Of course, making only the minimum payments is still better than not paying your debts at all, as you will be charged late payment fees and risk increasing your interest rates.
Low-Interest Cards for Bad Credit
Although these offers are mostly 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 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 annual fees.
Before you apply for a low interest card with poor credit, make sure to check the issuer’s requirements and see if you’re eligible for their card. Applying for multiple cards in a short span of time will damage your credit score, so try to avoid this.
RELATED: How to Fix, Protect and Grow your Score
If you need such 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
Overall, these card offers can help you stay on top of your finances and can be an excellent choice for those who carry a balance, or for those who are planning on making a large purchase and paying it off in the duration of their introductory APR.