As its name implies, a low-interest credit card promises to cost you less in interest than other types of credit cards. It's the best credit card if you have no choice but to not pay-off your credit card balance every month. People paid irregularly, such as real estate agents, contractors, and other self-employed people are the best users of low-interest credit cards.
Choosing the best low-interest credit card requires a close look at the offers, plus a realistic look at your financial management skills and habits. But at first glance, it would appear the smartest choice is to find the offer with the lowest interest rate — or is it?
More than 1,100 companies issue credit cards today, and each offers an array of card types that differ in significant ways:
Standard rate when any introductory promotional rate expires
Cash back or other rewards for card use
Annual fee, if any
Length of introductory interest rate, if any
Balance transfer offer, if any
The average interest rate for each type of card varies. Here are common credit card types and their interest rates.
Typical Interest Rates for Common Credit Card Types
Poor credit rating
Rewards & cash-back
Source: Survey of major credit card issuers, November 2015
Low-Interest Credit Card Features
A low-interest rate credit card typically features either a low fixed interest rate, or a low fixed rate during an introductory period followed by a higher, variable interest rate once the introductory period is over. Many low interest cards do not charge an annual fee. Low interest rate credit cards require good to excellent credit, meaning a FICO score of 680-740 (Good) to 740-850 (Excellent).
Generally, credit cards with a low fixed rates have modest introductory period offers. Card offers with a variable rates add a lot more marketing sizzle to offers during the introductory period, and then make up for their marketing costs by charging a higher variable rate later.
In the fourth quarter of 2015, variable APRs on low interest credit cards ranged from 11.9 to 22.9 percent depending on the credit rating of the applicant.
Credit card companies promoting low-interest cards with a variable APR use a wide variety of introductory offers. Common introductory offer types are:
Zero percent interest on introductory period purchases
Six- to 18-month introductory offers
Zero percent interest on balances transferred
Cash-back or other rewards
Read the fine print on any special incentives for low-interest credit card offers.
Most reward programs have a cash value of $100 to $200 and do not kick in until the cardholder has reached a dollar threshold in purchases, which may vary from a few hundred dollars up to $1,000. It is not customary for a credit card to offer both low-interest and rewards, so be sure the card issuer is really offering a card with a low rate.
The Credit CARD Act of 2009 requires that introductory interest rate offers must be in place for a minimum of 6 months. For competitive reasons, issuers offer periods longer than 6 months.
Fixed-Rate vs. Variable-Rate Low interest Credit Cards
Both fixed- and variable-rate low-interest credit cards have their advantages, especially when fees, special offers and rewards programs are factored in. The first step in deciding which is best is to consider how you will use the card. The credit card industry describes the two primary cardholder behaviors as transactors and revolvers.
If the cardholder uses a card for purchases and then pays off the balance each month, then the amount of interest charged is not that important — interest is charged primarily on the balances carried forward to the next month and with a transactor, there is no balance.
Transactor should choose cards with the lowest fees and best rewards program
If the cardholder is likely to carry a balance from month to month, he or she will pay interest charges on the balance carried forward. For revolvers, rewards programs and other incentives to spend are less important than the interest rate itself — the value of the rewards program in unlikely to match the additional costs of paying interest on the purchases.
The Revolver should choose a card with the lowest interest rates and finance charges and if possible, low or no fees
It is important to take a realistic look and how the cardholder will actually manage their credit card account. Most people choosing a new credit card intend to be Transactors and pay off their balances each month. In reality, many do not always pay off their balances and wind up paying interest charges and finance fees. More than 35 million Americans roll over $2,500 or more in credit card debt each month.
Credit Card Interest Matters!
Credit card companies publish the cost of interest charges as an Annual Percentage Rate (APR). On each statement, the company will state the "periodic rate," which is the figure the company uses to calculate finance charges for that particular billing period.
If credit card companies were to charge simple interest, then the amount of interest a cardholder pays would be a simple calculation: current month's purchases times the period interest rate. However, almost all credit card companies charge based on compound interest.
With compounded interest, the cardholder pays interest on current purchases as well as any outstanding balance from previous months, including previous interest charges. Since this practice means the cardholder is charged interest more than once for previous purchases, the net rate of interest paid can be significantly higher than the published periodic rate.
For example, if a cardholder spends $500 in purchases with a simple interest of 11 percent, the cardholder's interest charges will be $55 a year. If the cardholder pays off the $500 within 30 days, he or she will pay the $500 principal plus 1/12 of $55 in interest, a total of $504.83. If the balance rolls over to another month, the amount due is calculated on the new balance of $504.83. Left unpaid, the original $500 in purchases will have a balance due of $562.92, which means an effective interest rate of 12.58 percent.
Pay off a credit card balance as quickly as possible — you will save money if you do!
Another consideration when assessing the cost of a credit card is a credit card company's practice of charging interest based on the average daily balance. With the average daily balance method of calculation, the credit card company gives you credit from the day they receive a payment. The company then adds new purchases and cash advances and at the end of the billing period, divides the total by the number of days in the billing period to arrive at a daily average balance. The cardholder's interest is figured based on the average daily basis.
Pay a credit card bill as soon as possible — each day means additional interest charges!
Credit card companies typically charge one interest rate for purchases, and different interest rates for other credit card uses, like cash advances and transferred balances. Cash advances and other uses most often have a higher interest rate than the rate applied to purchases. The credit card company lists the categories of transactions and the interest rate applied on the monthly statement.
When you pay more than the minimum required, by law the credit card company must apply the amount you pay over the minimum to the balance with the highest interest rate. If a cardholder pays only the minimum amount, the credit card company has the right to apply the payment to a balance of its own choosing.
Most credit card companies provide special incentives to induce a cardholder to transfer a balance from another credit card company to their company. Promotions can include zero interest charged on the transferred balance for a period of six months or more. The credit card company may or may not charge a one-time fee for the balance transfer.
For the cardholder who is paying a high rate with a current card, transferring the balance to a new company with a lower rate is a great idea. However, any purchases made with the new card may incur regular interest rate charges immediately. If the cardholder clears the transferred balance plus new purchases within the allotted promotional window, he or she will save money. However, if the transferred balance remains on the books, the cardholder will be paying interest on a new, higher balance until it is paid.
Credit card companies typically allow a grace period, meaning the cardholder does not have to pay interest on new purchases for a specific amount of time. Grace periods are an incentive to get the cardholder pay the balance on time.
However, if a cardholder fails to make a payment within the grace period, or fails to pay the total amount, the cardholder loses the grace period benefit and interest rates kick in on a daily basis. The cardholder may have to make regular balance-clearing payments for a number of months before he or she can earn a return of the grace period benefit.
What You Can't Buy With a Credit Card
Mutual Funds and Stocks
Plastic works most everywhere for anything — with a few exceptions.
Know These Credit Card Laws
The U.S. government passed a federal law in 2009 called the Credit Card Accountability Responsibility and Disclosure Act, most often called the Credit CARD Act. The law governs how credit card companies market their cards and includes rules regarding rates, how principal and interest are calculated, how fees are assessed and what happens if a cardholder misses a payment or is in default.
The Credit CARD Act limits when a credit card company can increase rates on a new card, or on the existing balances of a card, an amount called retroactive interest rate hikes. Your credit card issuer may increase the rates on your credit card when:
The introductory promotional period ends, which by law must at least six months
If you agreed to a variable rate, which rises or falls based on a published index
If you are more than 60 days late in making a monthly payment
If you, after agreeing to a workout plan to pay off excessive debt, fail to make the agreed-upon payments
If the card member is a military service member who is no longer on active duty
These conditions have limits and nuances. For example, once rates have increased on a card, the card issuer must review the account every six months. If the market rates for interest decline, or if the cardholder has a positive change in creditworthiness, the card company must reduce rates to reflect the cardholder's financial progress.
Also, federal law caps credit card interest rates for active duty service members at 6 percent. Service personnel rates may rise to market rates when active duty ends.
Getting the Most Out of a Low-Interest Credit Card
To get the most out of a low-interest credit card, here are eight tips on credit card best practices:
Even a small balance means the cardholder will pay interest charges immediately and will lose the grace period
Even if the payment does not pay-off the balance, an early payment reduces the balance subject to daily interest charges
Depending on the interest rate of the account, making minimum payments can easily double the cost of the items purchased
If possible, keep your credit utilization less than 50 percent of your available balance. Never exceed your credit card limit.
You have liability for $50 of all charges if you report fraudulent card use less than 30 days after the bogus transaction. Your liability goes up the longer you wait.
Transfer balances to a card with a lower rate to save money, assuming you find a card with a zero-APR balance transfer period and low transfer fees
The credit card issuer will assess a higher interest rate and fees on cash advances
If a cardholder maintains a good payment record, he or she should contact the credit card company and ask for a lower interest rate if you're paying above-market rates