How does a low rate card work?
A low rate card works the same as any other credit card. You make purchases up to a certain limit over a period of time (typically 30 days). Then at the end of this period, you receive a credit card bill for all of these purchases.
You have a certain amount of time to make this payment without interest, called the interest free period. This is typically 55 days, but with a low-rate card it could be shorter. Anything you don’t pay within this time begins to accrue interest. By using these low rate products though, you minimise this additional expense.
How to compare low interest rate credit cards
If you are in the market for a low interest card, it’s likely you have decided that the interest rate you will pay is the most important thing for you. This implies you might not pay off your balance in-full every billing period. There are several other features to consider though:
Low rate cards generally come with lower limits, but there may be significant variation between products. It’s sometimes a good idea to take a card with a lower limit, forgoing a bit of spending power in return for a reduced interest rate.
When combined with a low credit limit, a low-rate card can limit the likelihood of a debt spiral, racking up huge bills with huge interest payments.
Promotional interest rates
Some cards offer a promotional period, where you pay very little or even 0% interest for a set period, normally between 6 and 18 months. If you are tempted by one of these products, you should ensure you also consider the rate that the card reverts to after this period is up.
Balance transfer rates
If you are considering moving your balance from one card to another, the new card may offer a balance transfer rate, which is often very low or even 0%. This rate only applies to debt that you bring over from your previous card, and can be a good way to pay off your debt without interest continuing to add up.
However, this reduced rate only applies for a limited time, so if you don’t pay all of your debts before this deadline, they will revert to whatever interest rate you are paying on the new card. There might also be a fee associated with balance transfers, typically 1-2% of the overall balance.
Cash advance rates
Certain credit card transactions incur your cash advance rate rather than the standard interest rate. This applies when you take out cash, for example, or buy foreign currency. These rates are usually much higher than the standard interest rates, so you should consider both.
Interest free period
With most cards, if you pay your bill within a certain period, zero interest will apply. This period is usually between 40 and 55 days. Choosing a card with a longer interest free period allows you more wriggle room to get everything paid without interest beginning to add up.
It’s also worth considering if the low-rate card has an annual fee. If you want a no-frills card that sits in your wallet for most of the year save for a few big expenses, it’s no use paying hundreds of dollars in annual fees for something you barely use. If you can, also look for a card with low or no annual fees.
Typically, the lower the interest rate on a card, the less features it will come with. You still may be able to find low interest rate cards with extra features though, so keep an eye out for options with cashback offers, complimentary insurance or rewards programs.
What are the advantages of a low-rate card?
Lower your interest payments
Using a low rate card means you will spend less on interest in the months you are unable to pay all your bills in time compared to other types of cards.
Pay off existing debts quicker
Transferring existing debts to a lower rate card can be a good way to reduce your interest payments. When using a 0% balance transfer offer, you may be able to eliminate interest completely and get on top of your debts.
What are the disadvantages?
Cards with low interest rates normally do not offer the range of features on more expensive cards. You may struggle to find low interest cards with many perks. These perks can include anything from airline points, complimentary travel insurance, cashback, and more. If these features are important to you, it could be worth finding another card.
While the interest you pay may be reduced, the card provider may charge higher annual fees to make up for their reduced income.
Generally, the lower the interest rate on a card, the lower the monthly limit will be. If you expect to make several expensive monthly purchases, you may not be able to find a low rate card that allows you to spend to the extent you need. There are usually penalties for exceeding your limit.
Is a low interest rate credit card a good idea?
The ideal credit card for you will depend on your spending habits. Low rate options are suited for those who do not have the ability to consistently pay their credit card debts on time. However, if you usually make all your repayments before the interest free period is up, your priority may be limiting the fees you pay, which are normally higher for low interest cards. There also may be people who fully utilise the range of features attached to higher rate cards, who ultimately find them cheaper.
At the end of the day, you should work out exactly what expenses you are going to use your credit card for, and then find a product suited to that. You should consider how regularly you will be making payments, whether you will be able to pay your bills on time, estimate how much you will spend monthly and whether you will use your card enough to take advantage of any rewards programs.
If you don’t always pay off the full balance on your credit card each month, you might want to consider a low rate credit card.
While you will still need to make the minimum monthly repayment, a low rate credit card can help you keep your debt under control by reducing the amount of interest you are charged on your remaining balance. They may not offer fancy rewards or perks, but they are a good option for staying on top of your finances.
Here you can compare different low rate credit cards from various banks and credit unions to find the best product for your needs.
You can also use our savings calculator to work out potential savings and possible earnings.