There was a time when credit cards were considered a luxury item reserved for executives and the high-powered elite. Fast-forward to the modern age, credit cards have become an essential item for virtually everyone – high school and college students, low-income earners, and high-income earners alike. Credit cards allow for greater flexibility when it comes to making payments, since society is rapidly moving away from a cash-based model to a credit and cashless system.
The ongoing search for the Holy Grail of credit cards continues, what with many rewards, benefits, varying interest rates, and terms and conditions available to clients. It’s important to understand how credit cards differ in terms of the benefits they provide to account holders. To get the ball rolling, a basic understanding of APR is needed, since this is what makes the difference between one credit card and another.
- APR – this is known as the annual percentage rate. The APR is the interest payable on a credit card when you borrow money. This rate is provided as an annual figure, known as the annual percentage rate. If you are assiduous about your repayments, you can avoid the interest repayments on your purchases by paying off your total outstanding balance in full every month.
An example will explain the concept of interest rates on credit cards: Let’s assume that you have a revolving credit balance of £10,000. If your daily interest rate is 0.041% (the equivalent of a 15% APR calculated by dividing 15% divided by 365 days), your interest repayment on £10,000 would be £4.10 daily. Now you understand how important it is to pay off your balances as quickly as possible.
- No Annual Fees – many credit cards come with annual fees. These could range from around £20-£450 (or USD equivalent) depending on the type of card that you have. Don’t be deterred from paying an annual fee if the benefits you receive from those fees are substantial. For example, you may earn a high amount of rewards points with every currency unit that you spend on your credit card, meaning that the annual fee more than pays for itself.
The right credit card may also confer additional benefits in the form of frequent flyer miles, a traveler program, car-rental options etc. that make the annual fees well worth the cost. As a rule, it’s important to see beyond the annual fees when it comes to selecting one credit card over another. If you are not looking for many rewards, you may find it highly beneficial to choose a credit card with no annual fees.
- Interest rate – this is effectively the APR that you’re paying on the credit card, and it’ll vary between a relatively low figure such as 12% to 28% or more. Typically, the better your credit score (a 3-digit number that qualifies you for bad, poor, average, good, excellent credit) the better the interest rate you qualify for.
Switching High-Interest Credit Card Debt to Low-Interest Credit Cards
There are many benefits to maintaining a low-cost credit card, notably the fact that you can transfer outstanding balances from high-interest credit cards to the low-interest credit cards. This is a great way to consolidate debts, provided that the balance transfer fees are not too restrictive. Ultimately, you want to be able to save money on the balance transfer and the monthly payments by consolidating onto a low-interest, or 0% APR interest (typically from 12 months to 18 months) credit card.
Be advised that the balance transfer fee can range between 3% and 5% of the amount that you’re transferring to the 0% APR credit card. If you owe £10,000, this amounts to £300 in balance transfer fees alone. At a 15% APR, that’s the equivalent of almost 75 days’ worth of interest repayments. However, if you have decided that you will repay your £10,000 outstanding balance on your credit card within 2 months, it is more beneficial for you to leave it on the high-interest credit card and save yourself £60 overall. Always do the math.
What Makes a Great Low-Interest Credit Card?
The number one criterion for a low interest credit card is the interest rate range that is typically levied on the card. If you search around, you will find credit cards starting with a regular APR of just 9.74%, and ranging as high as 17.99%. Depending on your preferences, you can enjoy rewards in the form of points, cashback, travel, and exclusive perks. Everyone wants to avoid making interest-related payments on credit card debt. There is absolutely no benefit to running up debts on credit cards, only to repay interest on your interest every month. The goal is to have access to the bank’s money, and pay as little as possible in interest charges.
As a rule, always look for credit cards with 0% APR for a limited time, low interest credit cards, no annual fee credit cards, or low balance transfer credit cards. If you can bundle up some of these, you will certainly enjoy the benefits of this type of credit card. Visa, American Express, MasterCard, Discover and other credit cards routinely offer a range of customer friendly options. It is worth checking out credit card aggregator sites for the best deals.