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Free vs paid: how to choose between low interest or interest-free credit cards

Free vs paid: how to choose between low interest or interest-free credit cards

When it comes to choosing your first or next credit card, it’s easy to feel overwhelmed with all the options. Whether it’s deciding between rewards programs, credit card issuers or if you’re team Visa, Mastercard or American Express, there’s a lot to consider.

One of the biggest questions you may ask yourself is whether it’s better to choose a low-rate credit card or take advantage of zero per cent interest introductory credit cards. Both credit card types have their benefits and their disadvantages and may better suit certain types of card users.

Let’s explore low interest versus interest-free credit cards and help to discover which type may suit your financial needs.

What you need to know about interest-free credit cards

Interest-free, or zero per cent interest credit cards, are a type of credit card option in which the card issuer does not charge the cardholder interest for a set period of time. This may be as a promotional, introductory offer to entice new customers to sign up for said card, or in the form of a balance transfer credit card for those struggling to pay off credit card debt.

Having months-long interest free periods may afford a cardholder a greater window to make purchases and pay off larger balances before accruing interest. For someone paying off existing credit card debt, it may offer a lifeline to stop a debt snowballing further while you have breathing room to pay it off.

While ‘interest-free’ may sound ideal, it’s still important to remember that your zero per cent interest rate will eventually revert back to the issuer’s standard purchase rate, which is typically higher-than-average. Also, you may find that you’re charged in other ways, such as annual fees and foreign transaction fees.

Pros:

  • Large window of time to make purchases without accruing interest
  • Pay off your existing debts without falling further into debt

Cons:

  • Interest-free period will end and generally revert to a high purchase rate
  • You may still be charged fees and other costs

What you need to know about low fee credit cards

The average credit card rate generally sits around 15-17 per cent - and this hasn't shifted too much in the last decade. Low fee credit cards do not pretend that they won’t charge you interest on your purchases but will offer you a lower-than-average interest rate - typically under 12 per cent.

As having a purchase rate on a credit card is generally unavoidable, if you know you’re the type of cardholder to get stung with interest, you may want to consider a low-rate option instead. Keep in mind that a card issuer may still charge you in other ways, such as annual fees or balance transfer fees.

Higher interest rates are typically associated to higher reward credit cards, such as those offering rewards programs and frequent flyer rewards points. The trade-off for paying less interest may be that you’re afforded fewer perks with a low-rate credit card.

Pros:

  • You will pay less interest and therefore lower credit card repayments
  • Reduce your risk of falling into debt from accruing interest on an outstanding balance

Cons:

  • Fewer perks and rewards are generally offered
  • Higher fees in some instances

How to pay no interest on your credit card

Realistically, if you want to avoid paying interest on your credit card, you’ll want to ensure you’re not spending out of your budget and you’re always paying off your balance in full each statement period. This is the ideal scenario for every credit card user. However, it’s not always realistic as financial situations can change at any time.

If you’re the type of cardholder who struggles to pay their balance in full, it may be worth considering a low-rate credit card. After all, if you’re going to face paying purchase rates eventually, you may as well try and find a card that offers as low an interest rate as possible.

If you’re looking to pay off an existing card debt, a zero per cent balance transfer credit card may offer you the much-needed breathing room you require to chip away at your debt once and for all. Just ensure you make a plan to pay the balance off in full, and ensure you lock away the balance transfer credit card, so you’re not tempted to spend and add to your existing debt.

For someone looking to make a one-off bigger purchase, such as new furniture and appliances, or a holiday, a zero per cent purchase credit card offering a large interest-free window may suit your financial goals. Assuming you’re approved for the card and an appropriate credit limit, you’ll be able to make your big purchase and have time to pay it off without falling into debt.

Also, keep an eye out for the number of interest-free days a credit card offers before you apply. If you’re looking to avoid interest charges but don’t want to commit to a zero per cent interest credit card, consider if a card with a high number of interest-free days (44-55 days) may better suit your needs.

Most importantly, if you’re struggling to make your credit card repayments on time, reach out to your card issuer. They should be able to help you with hardship support and potentially get you on a lower interest, or in interest-free, payment plan.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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