When to Choose a Low Interest Credit Card
Choosing the right credit card can be a daunting task, especially with the myriad of options available in the market. While rewards cards and cashback offers might seem enticing, there are situations where a low interest credit card could be the most prudent choice. Let’s explore when opting for a low interest credit card makes the most sense and how it can benefit your financial health.
Understanding Low Interest Credit Cards
Low interest credit cards typically offer interest rates several percentage points below the market average. While standard credit cards might charge around 20% p.a. or more, low interest cards often have rates starting from about 12% p.a. These cards usually come with lower annual fees or sometimes no annual fee at all, making them an attractive option for certain types of cardholders.
When to Consider a Low Interest Credit Card
1. You Carry a Balance
If you find yourself unable to pay off your credit card balance in full each month, a low interest card could save you a significant amount of money. The lower interest rate means less of your payment goes towards interest charges, allowing you to pay down your balance more quickly.
For example, if you have a $5,000 balance on a card with a 20% p.a. interest rate and only make minimum payments, you could end up paying thousands in interest over time. Switching to a card with a 13% p.a. rate could potentially save you hundreds of dollars per year.
2. You’re Consolidating Debt
Low interest credit cards can be an excellent tool for debt consolidation. If you have balances on multiple high-interest cards, transferring them to a single low interest card can simplify your payments and reduce the overall interest you’re paying.
Many low interest cards also offer balance transfer promotions, allowing you to move your existing debt to the new card at a very low interest rate (sometimes even 0%) for a set period. This can provide a valuable window to make significant progress on paying down your debt.
3. You Need to Make a Large Purchase
If you’re planning a significant expense that you’ll need to pay off over time, a low interest card can be a more cost-effective option than a standard credit card. The lower interest rate means you’ll accrue less interest as you pay off the purchase over several months.
However, it’s important to have a clear repayment plan in place. Even with a lower interest rate, carrying a balance for an extended period can still result in substantial interest charges.
4. You Want a ‘Safety Net’ Card
Some people prefer to keep a low interest credit card as a backup for emergencies or unexpected expenses. In these situations, having a card with a lower interest rate can provide peace of mind, knowing that if you do need to carry a balance temporarily, the interest charges won’t be as severe.
5. You’re a New Credit Card User
For those new to credit cards, a low interest card can be a good starting point. It provides an opportunity to build credit history while minimising the potential for high interest charges if you make mistakes in managing your balance.
Considerations When Choosing a Low Interest Card
While the interest rate is obviously a key factor, there are other elements to consider when selecting a low interest credit card:
Annual Fees
Some low interest cards come with no annual fee, which can be a significant saving. However, cards with slightly higher rates might offer other benefits that could outweigh a small annual fee, depending on your spending habits and needs.
Interest-Free Days
Many credit cards offer a grace period on purchases, typically around 55 days. During this time, you won’t accrue interest on new purchases if you pay your balance in full each month. Check the terms of any card you’re considering to understand its interest-free period.
Balance Transfer Offers
If you’re looking to consolidate debt, pay attention to balance transfer promotions. Some cards offer very low rates on transferred balances for a set period, which can be a powerful tool for paying down existing debt.
Additional Features
While low interest cards generally have fewer frills than rewards cards, some still offer useful features like purchase protection or travel insurance. Consider whether these additional benefits are valuable to you.
Making the Most of Your Low Interest Card
To maximise the benefits of a low interest credit card:
- Always aim to pay more than the minimum payment each month.
- Set up automatic payments to ensure you never miss a due date.
- Avoid cash advances, which often incur higher interest rates and additional fees.
- Regularly review your spending and look for opportunities to pay down your balance faster.
A low interest credit card can be an excellent choice for those who occasionally carry a balance, are working to consolidate debt, or simply want a lower-cost option for credit. By understanding when these cards are most beneficial and how to use them effectively, you can make a choice that aligns with your financial goals and helps improve your overall financial health.
Remember, the best credit card for you is one that fits your specific financial situation and spending habits. Always read the terms and conditions carefully and consider seeking advice from a financial professional if you’re unsure about which card is right for you.