Low, as low as zero, interest on a credit card sounds attractive. Who wouldn’t want to borrow money and pay it back at leisure with no ‘penalty’? But what sounds like honey can often be laced with bee droppings.
For those with excellent credit it is indeed possible to obtain a card with a comparatively low interest rate. Rates as low as 5% are still possible, though likely not for long. (9%-15% is more common, which is still good for credit card debt.)
For those with less than stellar credit, a low interest rate offer is more likely going to be one with hidden clauses.
Look for caps on amounts charged or transferred. Some offers allow the low rate only on transferred amounts. Other contracts specify limited periods. (6-12 months is common, 15 months is possible.) After that time, the low interest rate automatically switches to the normal APR on any remaining balance.
What is an APR? And what constitutes ‘excellent’ credit?
APR is an acronym for Annual Percentage Rate. Suppose you charge $100 and the APR is 12%. Does that mean you pay $12 in interest for the year? Probably not. The APR is divided up into a monthly rate, 1% per month, and applied EACH month to ANY outstanding balance.
How good your credit is depends heavily on your FICO score. (FICO is a number calculated by a secret algorithm that takes into account total outstanding debt, number and length of late payments, and other factors.) That number, along with an analysis of your credit report, containing age, length of credit history, kinds of debt, etc, determines how the card issuers view your credit worthiness.
For those who pass the ‘good credit’ filter, there are multiple criteria to consider.
Do you pay off your entire balance due when the bill arrives? If so, the APR is irrelevant since companies almost always forego applying any interest at all. (Note: They’re not required to. Technically, interest charges begin from the date of purchase, not when the statement is created.)
Do you use the card to make large amount purchases, or accumulate large balances in one month? If not, the difference between a low interest rate and the normal APR is usually insignificant.
Most low interest cards have ‘fine print’ limitations. These include limited time periods, after which the APR increases, caps on credit amount, etc. One low interest card type, the ‘balance transfer’, often limits the rate to the amount transferred. Interest on any new charges are calculated at the normal rate.
Also, keep in mind that cards actually have more than one APR. One rate applies to normal purchases, another to cash advances, etc. Read the contract carefully.
For those tempted to accept the low or zero interest offer, intending later to switch to another when the offer expires, a word of caution. Switching cards frequently can harm your FICO.
Every time you apply, a credit report is created and analyzed. Your FICO is partly dependent on the number of those credit checks performed. Also, your score is influenced by the length you have held a particular card. Many cards acquired in a short period is a red flag.
For those with genuinely good credit (680 or higher, in conjunction with other factors) a low interest card is a deserved reward for responsible behavior. Most are free of annual charges. And, if you maintain a monthly balance on a substantial amount, these cards can save you a significant sum.