Credit cards are often advertised with a bevy of perks and rewards hiding their high interest rates. But if you’re an everyday credit card user who doesn’t always pay off their full balance, finding a credit card with an interest rate under 12 per cent could save you money, time and worry.
What is credit card interest, and how can I avoid it?
Credit card interest is a fee that you pay in order to borrow money from your bank or credit provider. This is calculated on a percentage basis, otherwise known as your credit card interest rate. It’s important to remember that all purchases made on credit cards are essentially ‘borrowed money’. If you don’t pay the money back (i.e. pay off your credit card) within a certain timeframe, you will then accrue interest on top of your existing balance.
This timeframe is also called your interest-free period, or number of interest-free days. Your number of interest free days will depend on which credit card you have, and is calculated based on your billing cycle, not on the date of purchase.
The easiest way to avoid paying credit card interest is to pay your credit card bill in full, every month. In an ideal world such as this, no one would be paying any credit card interest. However, as human beings with imperfect spending habits, paying at least some credit card interest regularly is a reality for many of us. With this in mind, opting for a credit card with a low interest rate is one way to keep your finances in check.
How common is it to find credit cards with interest rates under 12%?
It’s not at all difficult to find a credit with with a low interest rate, especially from banks that are not part of the big four, which may offer a competitive interest rate to attract new customers and add a value proposition to their products.
You’ll often find more than 25 credit cards available in Australia with an interest rate at or below 12 per cent. If you’re in the habit of only paying off the minimum, or even just don’t pay your bill in full each and every month, a low interest rate card could be a great option to save you money in both the short and long term.
What are the downsides to a low-interest credit card?
Not many low-interest rate cards offer the coveted $0 annual fee that many providers use as a selling point.
Some even offer exactly zero interest-free days, making them a less attractive option for those of us who may not pay their bills like clockwork. Speaking of paying bills, expect to be slogged with a late payment fee if you do happen to exceed your interest-free days, whether that’s 0 or 62.
Don’t expect perks such as travel insurance, frequent flyer points or other rewards when opting for a low-interest credit card. These rewards come at a price, and usually that price is an interest rate around 20 per cent. You may find the occasional low-interest credit card that offers VIP seating for special events, or discounted travel insurance, but expect these perks to be subject to terms and conditions, and in no way guaranteed.
A credit card with an interest rate of less than 12 per cent, or even in the single digits, is its main selling point. If you regularly use credit card rewards or perks and don’t mind paying more interest for the privilege of doing so, this type of credit card may not be right for you.
Can I get a balance transfer on a low interest credit card?
If you have existing debt that you are trying to pay off, consolidating your debt into a balance transfer could be an option to simplify your repayment plan, especially if you have debt from multiple sources. Whether this is the right option for you will mostly depend on your personal circumstances, so it’s important to do your own research and crunch the numbers.
Balance transfer offers are less common for low-interest credit cards, but certainly not unheard of. Some may even offer a 0 per cent interest rate on balance transfers for the first 12 months, after which they revert to the credit card’s standard (or higher) interest rate. If you have debt that can realistically be paid off in less than 12 months, you might consider a balance transfer in order to stop accruing interest on your existing debt.
Is a low-interest credit card right for me?
A low-interest credit card might be right for you if:
- You don’t pay off your credit in full each month, and want to pay less interest
- You’re not in the habit of using credit card perks and rewards
- You have existing debt you wish to consolidate
As with all financial decisions, whether or not a low-interest credit card is the right option for you will depend entirely on your circumstances, lifestyle and any existing debt.
^The best credit card for you won't always be the one with the lowest interest rate, depending on your financial circumstances and goals. Compare the different credit card options before making your choice, and read the fine print. Consider contacting a qualified financial adviser for additional help choosing.