Do Low Credit Card Interest Rates Really Matter?

When it comes to credit cards, people are after the one that has the lowest interest rate, also call the APR or annual percentage rate. Smart credit card shoppers know to apply for the credit card that has the lowest interest rate, but why exactly does that matter? In some cases, interest rate doesn’t matter.

Background on Interest Rates

The interest rate is one of the things that affect how much you pay for your credit card. In general, the higher your interest rate, the higher your credit card cost.

Nearly all credit cards have multiple interest rates that apply in different situations so it’s sometimes hard to know exactly what interest rate you’ll be paying for a specific transaction. For example, there’s usually one interest rate for purchases, one for balance transfers, and one for cash advances.

You may have an introductory interest rate for balance transfers and another interest rate that goes into effect when that lowest interest rate expires. Then, there’s the default interest rate that’s applied when you fall behind on your credit card payments.

You might be able to keep up with all those different rates if you just have one credit card, but when the number of credit cards increases, remembering and understanding all your interest rates gets confusing.

When Does Interest Rate Matter

There are only a few situations when your interest rate really matters. First, if you carry a credit card balance, meaning you don’t pay it off at the end of every month, your interest rate is probably the most important factor on your credit card. Because you carry a credit card balance, a finance charge will be added to your balance every month. The finance charge is based on your credit card balance and your interest rate.

Interest rate also matters with balance transfers and cash advances. That’s because your credit card issuer doesn’t typically give you an opportunity to pay off these balances interest-free. Instead, interest is added everyday after the transaction is made instead of monthly as it’s done with purchases.

If you have a low introductory interest rate on purchases or balance transfers, you need to know how long the rate is going to late and what your rate is going to be when the introductory rate expires. Often, the normal interest rate that follows the introductory period is higher than interest rates on other credit cards.

Interest rate becomes a non-issue when you pay off your balance before the due date every month as long as your credit card issuer gives you a grace period. If you adopt this habit, it never matters much what your interest rate is because you never have to pay interest.

But, for everyone who doesn’t pay off their purchases, a low interest rate is ideal because you pay less money to the credit card companies when you carry a credit card balance. This often makes it easier to pay off your credit card balance since your monthly payments aren’t consumed by high finance charges.