If you don’t manage to pay your credit card in full each month, you could be adding hundreds of dollars in extra interest to your monthly credit card bill. Low-rate credit cards with interest rates under 10 per cent can help you keep your credit card debt under control and reduce the amount of overall interest you pay. Switching to a low-rate credit card can help you better manage your money while keeping your debt in check. Here’s what you need to know about credit cards with an interest rate under 10 per cent.
What is a low-interest-rate card?
Credit card interest rates can be confusing, especially with so many different cards and rates on the market. A low-interest-rate card is a credit card which charges you less than 10 per cent interest on your purchases. When you use your credit card, you’re essentially using the bank's money instead of your own. Because the bank is footing the bill up front, they charge you interest to cover their cost of lending you the credit. Interest rates vary between cards depending on the bank and features, but generally speaking, the Australian average is between 14 and 19 per cent. A low-interest credit card basically means your card costs you less because you’re paying less each month on interest payments.
Low-rate credit cards tend to have fewer bells and whistles than other cards. While you may not earn rewards or frequent flyer points, many low-interest-rate cards offer interest-free periods of up to 55 days.
The benefits of a low-interest-rate card
The main benefit of a low-rate card is that you’re charged a lower interest rate, meaning your credit card costs you less in the long run. A credit card with a low interest rate can help you keep your debt under control because you’re paying less interest on the money you owe. The ultimate end game is to pay your credit card’s balance in full at the end of the month, which means you get access to interest-free funds for a period of time. Sometimes, this doesn’t happen because life gets in the way. That’s where a low-interest-rate card can be of benefit. If you’re struggling to pay your full monthly balance on the due date, or if you’ve bought a big ticket item, then a credit card with a rate under 10 per cent can minimise the amount of debt you accumulate.
How do credit cards work?
Credit cards are similar to an unsecured personal line of credit. When you apply for a credit card, the bank will give you a credit limit which sets out how much money you can spend on your card. When you use a credit card, you’re paying for the items upfront using the bank’s funds. At the end of each billing period, which is usually monthly, the bank will send you a statement detailing how much you spent and what you need to pay back.
Depending on the type of low-rate card you have, you might have the added benefit of interest-free days on your card. An interest-free period is a set amount of time where you can repay your card balance without being charged additional interest. Most cards usually come with 55 days interest-free. If you don’t pay the full balance by the end of the interest-free period, the bank will start charging you interest.
How do I find out my interest rate?
While every card is different, most low-rate cards offer lower interest rates for purchases and leave the cash advance rate much higher. Each card has a different interest rate and fee structure depending on the type of card and the benefits on offer. Generally speaking, cards that offer rewards or frequent flyer points tend to have higher interest rates and fees than standard cards with no perks. To find out what your interest rate is, you can check your credit card statement, login to your internet banking or call the bank to check. If you signed up for a card with a low introductory rate or a 0 per cent promotion, there’s a chance the honeymoon period is over and your rate has gone up. To avoid paying unnecessary interest, keep an eye on your interest rate.
How do banks charge interest on my credit card?
Every credit card has different rates, charges and features. Generally speaking, if you’ve spent money on your credit card and haven’t fully paid the closing balance each month, you’re being charged interest. Because a credit card is essentially a loan from the bank, to make their money back they’ll charge you interest on your purchases. If you’ve got an outstanding credit card debt, the interest is usually calculated daily based on the balance and charged once per month.
If you’ve opted for a low-rate card with an interest-free period, you’ve essentially got a window of opportunity to pay your card balance without paying any interest. If you don’t manage to wipe the slate the clean in the interest-free period, interest will start accruing on the balance from that point onwards.
How do I avoid paying interest on my credit card?
The simplest way to avoid interest is to pay your credit card balance in full every month, but sometimes that can be a struggle. If you’ve got a card balance that’s climbing, consider switching to a card that has an interest rate under 10 per cent and offers you a 55-day interest-free period. The other option is to do a balance transfer to a credit card with an extended interest-free period.
The most important thing to remember is that interest never disappears; it grows until you pay it off. To avoid a growing balance, set up a direct debit and try to pay more than the minimum amount due every month – ideally, the entire balance.
How to lower your credit card interest rate
If you’ve been a loyal card holder and you’ve made regular repayments, you could call your card provider and try to negotiate a lower rate. If it’s not possible to lock in a better deal, you could consider a balance transfer to a low-rate card. Before you make the switch, carefully consider what options you really need. Gold or platinum cards tend to attract higher interest rates and annual fees. Do your research and work out whether it’s worth the extra fees.
^To find the best credit card for your needs, it's important to consider more than just the interest rate. Before making any decision, compare the features, benefits, fees and charges of the avaiable options, and remember to read the fine print. If you're having trouble working out the best credit card for your fianncial situation, consider contacting a qualified financial adviser.