Guide to Low-Interest Credit Cards
A low-interest credit card will reduce the total amount you pay in interest over the course of your repayment. You should pursue low-interest options if you frequently carry a balance from month to month. If you have a job that results in an irregular paycheck, such as contracting, real estate, or other forms of self-employment, you are one of the best candidates for this kind of credit card.
To choose the best low-interest credit card, you need to look closely at the offers and critically assess your financial habits. Going by appearances, the smartest choice would be the offer with the lowest interest rate, right? Read on to find out why that may or may not be the case.
More than 1,100 companies issue credit cards today, and each offers an array of card types that can significantly differ in these ways:
- Standard rates once introductory promotional rate comes to its end
- Rewards for using your card, like cashback
- Possible annual fees
- Introductory interest rate time period, if any
- The Balance transfer offers, if available
The average interest rate for each type of card varies. Below are some of the most common credit card types and the interest rates associated with each.
Typical Interest Rates for Common Credit Card Types
Low-Interest Credit Card Features
A credit card with a low-interest rate will typically feature either a fixed-rate at low APR or a low APR during an introductory period, which is followed by a higher variable rate thereafter. These cards usually don’t charge an annual fee. They do require a FICO credit score of “Good” (680-740pts) to “Excellent” (740-850pts).
Credit cards with low fixed rates usually have moderate introductory offers. The variable rate ones, however, will offer more enticing promotions in order to reel you in. Even if they don’t make money during the promotional period, they expect to make up for it later when the higher variable rate will apply.
During the fourth quarter of 2015, for example, the variable APR on low-interest credit cards ranged from 11.9% to 22.9%, depending on the credit score of the applicant.
A credit card company using a (higher) variable APR may try several different avenues to make their offers more appealing. Common introductory offers include:
- 0% Interest on purchases during the introductory period
- Introductory offers for 6-18 month
- 0% Interest on transferred balances
- Rewards like cash-back
Make sure you read the fine print on any promotions, offers, or incentives to make sure you know what you’re getting.
Most cashback reward programs don’t kick in until the cardholder has reached a certain threshold amount in purchases, which could be anywhere from a couple hundred to a thousand dollars. The most common cash value of such programs is $100-$200. If a low-interest credit card also offers such a cashback program, check the fine print carefully. Credit card issuers don’t generally combine these offers, so make sure you take a second look.
The Credit CARD Act of 2009 sets a minimum period of 6 months on any introductory rates offered by a credit card issuer. In the course of competing with each other, companies frequently offer longer introductory periods, up to 18 months.
Fixed-Rate vs. Variable-Rate Low-interest Credit Cards
Both fixed and variable rates carry their own advantages and disadvantages. Don’t forget to factor in any fees, rewards, or bonus offers into your calculations. But before you do anything else, sit down and determine how you will actually use the card. There are two main types of cardholders, according to the credit industry: transactors and revolvers.
Transactors
If you use your card for everyday shopping and pay off your balance every month, you’re a transactor. The interest rate on your credit card doesn’t matter much to you, because you never carry a balance forward, which is how interest is primarily gathered.
Best Card Choice
A transactor-type cardholder should choose a card with the lowest fees and best rewards program.
Revolvers
If, on the other hand, you’re likely to carry a balance on your card, the rate of interest you will pay becomes very important. Rewards and spending incentives are not your top priority. You want the lowest possible interest rate so that your balance doesn’t continue to grow faster than you can pay it down. No rewards program is likely to make up for the extra cost of higher interest on your monthly balance.
Best Card Choice
A revolver-type credit user should choose a card with the lowest interest rates and finance charges, and, if possible, low or no monthly fees.
Take a realistic look at how you’ll actually manage your credit account. Just because you intend to be a transactor, doesn’t mean you won’t slip into being a revolver. Take a hard look at yourself and your spending habits. Are you really a transactor? Or will you join the more than 35 million Americans who roll over monthly credit card debt of $2,500 or more?
Credit Card Interest Matters!
The cost of interest charges isn’t a straightforward percentage of your balance. The credit card companies publish interest costs as an Annual Percentage Rate or APR. The “periodic rate” will appear on each billing statement—and this is the figure the company will use to calculate their finance charges per billing period.
If interest was charged at a single, one-time rate, calculating interest would be simple: the total amount of the current month’s purchases times the periodic interest rate. Instead, almost all credit card issuers make their money by using compound interest.
Credit Cards & Compound Interest
Compound interest works by charging interest on current purchases, AND on the outstanding balance carried over from previous months, with any previous interest charges added to the total. This means that interest is charged more than once on previous purchases, which can bring the effective interest rate to a much higher total than the published periodic rate.
Let’s take the example of a $500 balance and the simple interest rate of 11%. At this rate, the cardholder will pay an extra $55/year. If the customer pays off the balance within 30 days, that $55 annual rate is divided by 12, for the months of the year, for a new total of $504.83.
Yet, if that new balance rolls over to another month, interest is reassessed—not on the original total of $500, but on the new total of $504.83. If this continues for one year, instead of the simple interest rate we calculated earlier—$55—this compounded rate will cost the cardholder $62.92 over the original balance of $500. This makes the interest rate, not the published 11%, but effectively 12.58%.
Lesson Learned
Don’t put off paying your credit card bill, and don’t carry a balance if it all possible. Compounding interest will cost you more money in the long run.
Average Daily Balance
Another thing you should do when considering your options is to calculate interest based on your average daily balance.
Using this method, a credit card company extends credit to you beginning from the day they receive your last payment. They add together all purchases you make with the card and any cash advances you used, then divide that total by the number of days in the billing period. The result is your average daily balance, and your interest costs will be calculated based on this figure.
Lesson Learned
Pay every credit card bill promptly, because every day that you wait will mean additional interest charges.
Balance Transfers
Credit card companies love to poach balances from each other, and will typically offer appealing incentives if you transfer your balance to their card. The most common promotion is a zero interest rate charged on the transferred balance for a minimum of 6 months, and often more. There may or may not be a one-time fee to process the transfer.
If you are currently paying a high-interest rate on your card, transferring your balance to a company offering a lower rate will save you money in interest. But you will need to make sure that any ongoing purchases on your new card will fall under the promotional rate. If you can clear out your balance, and any new purchases made during the introductory period and avoid the higher interest rate to come later, you will indeed save money.
But beware. If you don’t close out the balance before the promotional interest rate ends, you will pay the higher rate on anything you still owe and could end up paying more than you started with before the switch.
Multiple Interest Rates on a Single Bill
Most credit card companies will charge you one interest rate for purchases, and a different rate for other uses, such as a cash advance or balance transfer. A cash advance will typically incur a higher rate of interest than purchases you make with the card. On your monthly statement, the credit card company will list all of the interest rates for the various forms of transactions on your credit card.
When you pay anything above the set minimum payment, the credit card company is required by law to apply anything over the minimum to the balance with the highest interest rate. If you pay only the minimum amount, the credit card issuer can apply the payment to the balance of their choice.
Grace Periods
There is typically a grace period on new purchases allotted by the credit card company. This means that the card-holding customer pays no interest on those purchases for a specified number of days. This is to incentivize their customers to pay their balances on time.
If the cardholder does not make a full payment before the grace period ends, the grace period will be suspended. Interest will be incurred on a daily basis, starting immediately from the date of purchase. The credit card company may require a certain number of balance-clearing monthly payments before the grace period is earned back and reinstated.
What You Can’t Buy With a Credit Card
Know These Credit Card Laws
In 2009, the US government passed the Credit Card Accountability Responsibility and Disclosure Act at the federal level. This law, known as the Credit CARD Act, applies to how credit card companies can market their products and sets rules concerning their rates, the calculation of interest and principal, how they can assess fees, and the consequences for a cardholder who misses a payment or goes into default.
The limits set by the Credit CARD Act govern when a company can increase interest rates on a new card. It also limits when a credit issuer can increase the interest on the existing balance of your card, which is termed a retroactive interest rate hike. Your credit card company is allowed to increase rates if:
- The introductory, or promotional, period has come to an end, which by law must be a minimum of 6 months.
- Your agreed variable rate rises or falls based on a published index.
- Your monthly payment is more than 60 days late.
- You agree to work out a plan to pay off excessive debt but fail to make the agreed-upon payments.
- Or, the cardholder served in the military but is now no longer on active duty.
Even these conditions have some limitations and exceptions. Once rates increase on a card, for example, the card issuer is required to review the account every 6 months. If market interest rates decline or the cardholder has an increase in creditworthiness, the credit card company must then reduce its rates on that account to reflect the change.
In addition, federal law places a limit of 6% on the credit card interest rate that can be charged to active duty military service members. The rates may rise to reflect current market levels once active duty ends.
Getting the Most Out of a Low-Interest Credit Card
Follow these 8 easy tips to get the most from your low-interest credit card:
1. Pay the Full Balance Every Month
Even if you carry only a small balance, you will pay interest charges beginning immediately and will lose your grace period on future purchases.
2. Pay Your Credit Card Bill Quickly
Even if your payment doesn’t fully negate your balance, paying sooner reduces the amount that remains subject to daily interest charges.
3. Pay More Than the Minimum Payment
It depends on the rate for your account, but never paying more than the minimum can easily cost you twice as much overall.
4. Avoid Exceeding Your Credit Card Limit
Watch your credit utilization ratio. Try to keep your credit usage at half of your available credit or less. Never max out your card.
5. Keep Track of Your Transactions
Your liability for fraudulent charges is capped at 50$ if you report it within 30 days. Waiting longer increases your liability.
6. Transfer if You’re Paying a High Rate
If you can find a card with a lower rate, that also has low transfer fees and a zero-APR introductory period, transfer your balance to this card as soon as possible.
7. No Cash Advances
Cash advances are subject to a higher interest rate and higher fees than other credit card uses.
8. Be Assertive With Your Credit Card Company
If you are paying above-market interest rates, but maintain a good payment record, you should contact the credit card company and ask for a lower rate.
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