Looking Beyond a Credit Card’s Interest Rate
When you see an advertisement for a credit card, it’s likely that the interest rate is featured extremely prominently in the promotion, especially if it’s a low figure compared to rivals on the market. Also, comparison tables and websites usually list card offers by their APR, with the assumption that a lower interest rate is always preferable. But is this really the most important thing to consider when choosing a card? Not necessarily — it depends on how you plan to use your account.
If You Pay in Full
Credit cards may be forever linked with horror stories of people building up huge amounts of debt, but in reality, this is relatively rare. In fact, it’s estimated that around 60% of cardholders pay off their account balance in full each month, and so carry no debt at all. These days, the vast majority of cards provide a “grace period” of around 55 to 60 days before charging interest, so long as the balance is cleared shortly after each statement. If you use your card like this, the APR is basically irrelevant, and the account’s other features will be far more important.
If You Carry a Small Balance
Even if you carry a small balance from time to time, the importance of the APR may be outweighed by other factors. For example, some cards still charge an annual fee, particularly those at the very top and bottom ends of the market. On small balances, it may be worth putting up with a couple of extra percentage points on the interest rate to avoid fixed costs like this.
If Your Card Offers Incentives
Many cards offer incentives of one kind or another, which provide a benefit whenever you use them. Depending on the particular deal, these incentives may be more valuable to you than a slightly lower standard interest rate. For example, even if a card’s cash back rate is only a minuscule 0.25% of your spending, if your card turnover is large, then this can quickly mount up to a significant sum. The same can be said of the various reward schemes available – and these can be even more valuable if you find one that fits well with your lifestyle. In both cases, however, if you carry any significant amount of debt, the interest charges will likely dwarf your earnings from incentives.
Cards Which Make Charity Donations
Charity cards are a special case of incentivized cards, donating a portion of your spending to charity. These cards make regular giving automatic and easy, and many people are happy to pay a slightly higher interest rate in light of this. Of course, you could probably save money by donating directly rather than via your credit card spending, but charity cards make the whole process extremely convenient and less likely to be forgotten.
Balance Transfer Users
Lastly, if you’re taking advantage of a 0% or low-rate balance transfer deal, the headline APR doesn’t matter for the length of the introductory period – at least so long as you don’t use the card for purchases at the same time.
The APR figure may have pride of place in most credit card advertising, and it may be a reasonable indicator of a card’s overall value, but it’s not always the most important thing to look for. Depending on how you use your card, a low interest rate may be merely a nice bonus to have, rather than a decisive factor in choosing which one to apply for.