How to Choose a Low-Interest Credit Card
The average credit card balance in the first quarter of 2019 stood at a whopping $6,028, according to the latest data from the credit bureau Experian. Even worse, total credit card debt in the U.S. has increased 29% in the past five years, reaching $807 billion.
With numbers like that, it’s no wonder consumers are seeking low-interest credit cards. The lower your interest rate, after all, the less you have to pay your lender for the privilege of borrowing and the more you can put towards getting out of debt.
If that sounds appealing to you, then we have good news. If you’ve got good credit, there are several different types of low-interest credit cards on the market today, and each one can help you in different ways.
The term “low-interest” credit card can refer to a card with an introductory annual percentage rate (APR) offer of 0% or simply a card with an APR that’s lower than prevailing rates. The average APR on credit cards as of May 2019 was 15.13%, according to the latest Federal Reserve data. If you’ve got good credit, you can find cards with ongoing rates much lower than that: 7%-9% in some cases.
Types of Low-Interest Credit Cards
Maybe you’re about to incur some unusually large expenses—you’re getting married or embarking on a home renovation project—and just need some time to catch up with your costs.
Or maybe your future is murky. If you’ve lost your job, are having a medical crisis, or are getting divorced, you may not know what kind of financial situation to expect down the road. Considering these factors will help you choose which credit card is right for you.
Intro APR of 0%
If you know you’ll be making a big purchase soon and can pay it off over the course of several months, a 0% APR card may be the right choice.
These cards offer a 0% APR “teaser” or “intro” rate that lasts for a set period of time, usually a few months to as long as 18 months. After the 0% period ends, you would pay interest on any remaining balance at the ongoing APR. But ideally, you’d be able to pay off the balance entirely by that point.
Beware of so-called deferred interest cards, often issued by retail stores. These look like intro 0% APR cards at first glance, but there is a catch. If you don’t pay off your balance in full by the end of the intro period, you’ll owe interest retroactively on your entire balance—not just the balance you have left—and the interest rates can be as high as 25%.
Balance Transfer APR of 0%
If you’re already carrying a balance on a high-interest rate credit card, a good option may be a 0% balance transfer card. These are similar to the intro 0% APR credit cards, but the promotional rate only applies to the balance that you’ve transferred to the card.
These cards may or may not offer an intro 0% APR on new purchases as well. For example, a card might have a 0% APR offer that lasts 21 months on balance transfers and 12 months on new purchases.
If the incentive is just for balance transfers, you would pay the regular ongoing APR on new purchases. This is a reasonable option if your monthly budget has returned to a comfortable level after an unusual set of expenses.
One critical factor for these types of cards is the balance transfer fee charged when you make the transfer. These are typically 3%-5% of your transaction amount, so you should do the math (using a balance transfer calculator like this one) to make sure you still come out ahead when weighing your savings on interest. Either that or find a card that doesn’t charge a balance transfer fee. They aren’t very common, but there are some out there.
Low Ongoing APR
If you expect to carry a credit card balance for the foreseeable future—either because you’ve had a big unexpected life event or you just can’t make ends meet—look for a card with a lower-than-average interest rate, and even better, one with an intro or balance transfer offer as well.
If you’ve got good credit, it’s not that hard to find credit cards offering APRs of 7%-9%. Make sure to read the fine print, however, to ensure that this isn’t just an intro rate.
Other Factors to Keep in Mind
- Moving to a lower interest rate may not save you money if you’re paying in other ways. Besides the balance transfer fees we’ve just discussed, companies may charge you an annual fee. If there are fees, make sure the money you’ll save on interest more than makes up for your costs.
- The APR you’re offered will depend on your credit score and creditworthiness. Because you’re better off applying only for cards you have a good chance of getting, we recommend that you check your score first to narrow down the pool of cards you’re considering.
- APRs are often variable. This means they move with the U.S. prime rate, a benchmark closely linked to the Federal Reserve’s target rate.