What is a low interest credit card?
When it comes to paying interest on borrowing, we’re all used to honing in on lower numbers and thus, interest free credit cards are often heralded as the ultimate money savers.
If you’re not eligible for an interest free card or have an expensive item to pay for or balance to clear, a low interest credit card could work out as the next best option for you.
And that, my friends, is all thanks to compound interest. Not sure how it all works? Grab a brew, clear your mind and let us spend a few moments together unravelling how credit card interest works and why 0% interest isn’t always better than a low interest rate.
How credit card interest works
Credit card interest is the fee you agree to pay for using your credit card provider’s funds to delay when you pay for goods and services. If you clear your balance in full and on time every month you don’t need to pay the interest. If you don’t clear the full amount, the interest is worked out as a percentage of your balance and added to the money you owe.
This is where things can get confusing. You’re likely to be familiar with your agreed rate of interest as APR – or annual percentage rate. This is the percentage of interest you’ll pay over the course of a year and is usually calculated with a representative sum of £1,200 for illustrative purposes. So if your APR is 19%, you’re not paying 19% of your monthly balance, but your annual balance.
Interest upon interest
If you don’t clear your full balance each month you’ll have interest added. By the second month of doing this you’ll be paying interest on the interest added the previous month. This is because interest on credit cards is compounded, which is why debts can quickly start to grow if you don’t clear that balance. If your interest rate is low, you’ll clear your balance more quickly compared to a card with a higher rate of interest when making the same payments.
For those on interest free periods for purchases or balance or money transfers, no interest is added during the agreed period. However, when the debt switches to what is usually a much higher rate, just a few months at this rate can add more interest than if interest had been charged at a low but consistent rate over the same time period. And thus, depending on your individual circumstances, how much you can afford to pay each month and the borrowing available to you based on your credit score, sometimes low interest can be better than no interest.
Not sure a low interest credit card is for you? See our guides to understanding credit cards, which credit card is best for me or find alternatives to credit cards here.
Compare low interest credit cards
Starting to think a low interest card could bring good karma to your financial future? Whether you’d like to snag a low interest rate for spending or want to save by switching to a lower interest card with a balance transfer, our MoneyMatcher can help you find your match.
Enter your details and reveal your desires and within a few shakes of a camel’s tail you’ll have a table of credit cards picked out especially for you. We use a soft search to highlight products you’re more likely to be accepted for without leaving a mark on your credit file. Our neat and tidy tables make it easy to compare and contrast the overall cost of borrowing along with features and fees.
As ever, it’s important to remember that only 51% of people accepted for the card will secure that representative rate, so you might be offered a slightly different deal. Ready to get started?