How to Choose a Low-Interest Credit Card

Forget about reward programs, cash back, air miles, and perks; forget about VIP airport lounges and statement credit. The single most important aspect of a credit card is the interest rate. A low APR could save you hundreds, if not thousands of dollars a year, yet it’s something that so many applicants overlook.

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If you want to avoid credit card debt or limit the damage that it does to your finances, you need to get the lowest interest rate possible for your credit score, and in this guide, we’ll show you how to do just that. 

The Best Low-Interest Credit Cards

Before we discuss the importance of a low APR, and the benefits of reward and balance transfer credit cards, we’ll look at the cards that traditionally offer the lowest rates.

It’s worth noting, however, that these rates are based on ranges, and if you’re at the top of that range it won’t seem like a low-interest card at all. The goal is to find a card with a low range that offers the lower end of that range to the majority of applicants, but you also need to take a few simple steps to improve your financial situation, which we’ll discuss a little further below.

Discover It

The Discover It credit card comes in many forms, including ones aimed at students, users with bad credit, and those seeking to make a balance transfer. All these cards, including the Discover It secured credit card, have a rewards scheme offering at least 1% cash back on everyday purchases.

What’s more, it has a balance transfer offer of 0% APR for the first 18 months and all cash back rewards earned in the first year will be matched by Discover, making this the best cash back card for new users. For a low APR card that also provides great cash back rewards, perks and more, apply now.

  • Issuer: Discover
  • Annual Fee: $0
  • Variable APR: 13.49% to 24.49% 
  • Account Opening Offer: All cash back matched for first year
  • Foreign Transaction Fees: $0
  • Introductory APR: 0% purchase APR for 6 months
  • Rewards Program: Up to 5% cash back

Capital One Quicksilver

The Capital One Quicksilver credit card has a 0% introductory period that lasts for 15 months and applies to both balance transfers and purchases. There is no sign-up bonus or intro reward rate, but you can earn $150 when you spend $500 in the first three months and it has an unlimited 1.5% reward rate that applies to all purchases.

  • Issuer: Capital One
  • Annual Fee: $0
  • Variable APR: 15.49% to 25.49%
  • Account Opening Offer: $150 when you spend $500 in first 3 months
  • Foreign Transaction Fees: $0
  • Introductory APR: 0% on purchases and balance transfers for 15 months
  • Rewards Program: 1.5% cash back on all purchases

Chase Freedom

A cash rewards credit card that comes close to matching the Discover It, the Chase Freedom offers up to 5% cash back for the first $1,500 that you spend every year, with rotating bonus categories that include grocery stores, gas stations, and other everyday expenditures.

  • Issuer: Visa
  • Annual Fee: $0
  • Variable APR: 16.49% to 25.24%
  • Account Opening Offer: $150 when you spend $500 in first 3 months
  • Foreign Transaction Fees 3%
  • Introductory APR: 0% on purchases and balance transfers for 15 months
  • Rewards Program: 1% to 5% cash back

Capital One VentureOne

The CapitalOne VentureOne card is the issuer’s best reward card aimed at frequent flyers. Earn 1.25x reward points on all purchases and transfer these to 12 different loyalty reward programs. In the first three months, you can also secure 20,000 points (a value of $200) when you spend $1,000.

  • Issuer: Capital One
  • Annual Fee: $0
  • Variable APR: 13.49% to 23.49% 
  • Account Opening Offer: Get 20,000 miles when you spend $1,000 in three months
  • Foreign Transaction Fees: $0
  • Introductory APR: 0% intro APR on purchases for first 12 months
  • Rewards Program: Travel rewards program

American Express BlueCash Everyday

The American Express BlueCash Everyday card offers a low APR and penalty APR, with no annual fee and a bonus offer that drops $150 statement credit into your account when you spend $1,000 in the first quarter. 

The rewards rate offers between 1% and 3%, with the higher rates capped at annual limits and offered for money spent at supermarkets, gas stations, and department stores.

  • Issuer: American Express
  • Annual Fee: $0
  • Variable APR: 14.49% to 25.49% 
  • Account Opening Offer: $150 statement credit when you spend $1,000 in first 3 months
  • Foreign Transaction Fees: 2.7%
  • Introductory APR: 0% purchase APR for 15 months
  • Rewards Program: 1% to 3% cash back

 

Wells Fargo Cash Wise Visa

The Wells Fargo Cash Wise Visa offers up to 5% cash back on specific purchases and once the limits are reached it drops down to an unlimited rate of 1.5%. Applicants are also offered Apple Pay and Google Play benefits, as well as $600 worth of cell phone protection.

  • Issuer: Visa
  • Annual Fee: $0
  • Variable APR: 15.49% to 27.49%
  • Account Opening Offer: $150 when you spend $500 in first 3 months
  • Foreign Transaction Fees: 3%
  • Introductory APR: 0% on purchases and balance transfers for 15 months
  • Rewards Program: Up to 5% cash back

What is an Annual Percentage Rate?

Often abbreviated to “APR”, an Annual Percentage Rate is designed to help you compare credit cards and is required, by law, to appear on all credit card offers. If one card has an APR of 25% then you’ll know, without doing any further research, that it has a lower interest rate than a card with an APR of 26%. As a result, your balance won’t grow as quickly and if all other things remain the same you will pay less over the term.

However, contrary to what many cardholders believe, an APR of 25% doesn’t mean you will pay exactly 25% on top of your balance every year. It doesn’t mean, for instance, that a $10,000 balance generates $2,500 worth of interest for every year that it remains unpaid.

Interest accumulates daily, not annually. The amount you pay per day is basically [YOUR APR] / [DAYS IN ANNUAL CYCLE]. In the above case, that means 25% / 365. On the first day, your balance grows by an infinitesimal sum, and on the second day, the interest is calculated against that sum and not the original balance.

This is known as “compounded interest” and essentially means that you’re paying interest on top of interest, which is why it grows so big so quickly, and why your balance doesn’t seem to reduce no matter how many minimum payments you make.

Types of Credit Card APR

  • Purchase APR: The interest that you pay on a rolled-over balance, which is a balance that you do not repay at the end of the month. If you repay your balance in full at the end of all billing cycles, you generally won’t be charged any interest.
  • Cash Advance APR: The rate charged when you use your credit card to withdraw money from an ATM. You may also be charged cash advance fees when you use your credit card to gamble, purchase money orders and gift cards or initiate any other type of cash transaction.
  • Introductory APR: An intro rate is used to attract new customers and typically offers you 0% on purchases and transfers for a limited period.
  • Balance Transfer APR: An APR charged on all balance transfers, often in combination with a balance transfer fee. This occurs when you move your balance from one (or more) credit cards to a balance transfer credit card.
  • Regular APR: The rate charged after the introductory APR period is over. 
  • Variable APR. A non-fixed rate that is subject to change in the future based on the prime rate.

​Why is a Low-Interest Rate Important?

If you pay off your credit card balance every month, the interest rate doesn’t really matter. This is how credit cards should be used, but it’s a habit that many users struggle to keep. Once you fail to clear the balance during any given month, it rolls over, interest accrues, and you’re trapped right where the credit card issuer wants you.

At this point, every single percentage point counts. As noted above, 25% APR doesn’t simply mean that you’re paying $2,500 on a $10,000 balance, in which case 1% less equates to $2,400. Once you add daily compounding interest to the mix and consider that you’re probably still using that card, that balance climbs very quickly.

Let’s assume that you have a credit card balance of 25% and a goal to repay that balance in 80 months. You would pay $9,400 in interest over the course of the term. If you reduce that APR to just 23%, you will pay $8,600, saving yourself $800 over the term. And that’s assuming you don’t increase that balance, meet all of your monthly payments and are not hit with any late fees or penalty fees.

A low-interest rate is important because a high rate can cost you hundreds or thousands of dollars. In this case, while $800 may not seem like a huge sum, it’s 8% of your balance and it stems from an interest rate increase of just 2%. Imagine how much difference a rate change of 10% would be!

Why do High APR Credit Cards Exist?

High-interest rates exist for two reasons. Firstly, they help to offset losses and liabilities. This is something we have discussed many times before here on PocketYourDollars, but it’s something that’s worth reiterating. Simply put, an individual with a high credit score and a respectable credit history is more likely to meet their payments on time and repay their balance, and all due interest, in full.

An individual with bad credit and a low credit score, however, is much less likely to do these things and runs a greater risk of default. If a credit card company has 1,000 customers of each type, they may expect a default rate of just 5 to 10 for the former group and anywhere from 50 to 100 for the latter.

Users with good credit histories are rewarded with low APRs because the issuer will still profit, while users with bad credit histories need to be charged more to offset the greater losses and risks and continue to guarantee a profit.

And the difference between these consumers is massive. The average default rate for all credit card users is between 1% and 3%. If you focus only on good credit users, that rate drops to an infinitesimal sum. 

We don’t have data on those whose credit scores were so low they weren’t accepted, but for those consumers, we only need to look at payday loans—the last chance saloon for anyone refused a credit card. The rate of default on payday loans is between 40% and 50%, which proves just how vast the gulf is between those with excellent credit and those with bad credit.

The second reason lenders set the rates so high is because they know consumers will pay them. If you’re desperate for credit and your credit score is teetering on the edge, so much so that your only other option is to get a payday loan, you’ll accept the first credit card offer you receive, even if the APR is extortionate.

How to Qualify for a Lower Interest Rate

There are a few things you can do to secure the lowest interest rate credit cards. It takes just a few months to make some serious changes and secure a solid APR offer that saves you a small fortune over the next few years.

1. Improve Your Credit Score

Your credit score is incredibly important. It’s how lenders determine your creditworthiness and for the most part, it’s what they use to set your credit card interest. The higher your FICO score is, the more likely you are to receive a respectable offer on your new card.

  • Keep Credit Accounts Open: While it’s tempting to close your cleared credit cards, it will actually benefit your credit score more if you keep them open. That way, your credit limit stays high while your debt reduces, thus increasing your credit utilization ratio.
  • Repay and Don’t Spend: The more of your debt that you repay, the more your credit utilization will improve. At the same time, you should avoid making any big purchase, as that will take a chunk of your credit limit away, thus reducing your credit utilization.
  • Meet Your Payments: A late payment can stay on your credit report for up to 7 years and reduce your credit score significantly. If you make your payments on time, however, your payment history will gradually improve and take your score with it.
  • Avoid New Applications: Every time you open a new credit card or bank account; every time you take out a loan, your credit score will take a hit. It will be slight, but if your goal is to improve your score as much as possible, it’s important to keep moving forward and avoid anything that could set you back.

2. Look for an Intro APR

As discussed in our above list of the best credit cards, you can often secure a 0% APR when you first apply for a credit card and this often remains for the first 6 or 12 months, depending on the type of card. 

This APR rate often applies to balance transfers as well as all new purchases, and essentially means you can grow your balance without accumulating interest and hit 100% of the principal when you make repayments.

These rates are essential if you’re moving balances, as discussed below, but they can also help if you need a new card to make a big purchase or two and won’t have the money to repay it straight away. 

It’s important, however, to avoid abusing this rate, accumulating large amounts of credit card debt that will hurt your financial situation for years to come.

3. Compare and Shop Around

Don’t assume that the first rate you’re offered is the best. Credit card issuers earn their money by charging you interest and may add a few more percentage points than their competitors. It’s important, therefore, to shop around, try a few different issuers and cards, and look for the best possible rate.

If you’re worried about a hard credit check, which is initiated when you apply to a new card, don’t be. The creditor is required to warn you before initiating one of these checks and it won’t provide them with more information than a soft credit check. 

Most lenders won’t run a hard credit check until the final steps of the process, at which point you already have all the information you need to make an informed decision.

What About Rewards Credit Cards?

Reward cards have a reputation for charging higher interest rates and this is something we have touched upon in the past. However, this isn’t always the case and if you shop carefully and have a good credit score, you can find a reward credit card with a respectable APR. 

In most cases, it doesn’t matter all that much anyway as the type of user that benefits from a rewards card is not necessarily the same type of user that benefits from a low APR.

If you don’t pay off your balance in full every month, a low-interest rate should be your only focus. Rewards can help, but for the most part, they’ll just be offsetting some of the damage and they will never provide enough perks to cover the interest you pay when you don’t clear your balance in full. However, if you do clear your balance in full, those perks can provide you with a little unexpected cash back every month and you may come out of this deal on top.

We still recommend looking for low-interest rate, because you may hit a rough patch and be forced to let the balance rollover, but if you’re a responsible credit card user with a history of paying balances in full every month, the rewards are just as important as the interest.

What Should You Do if you’re Paying High-Interest Charges?

If you already have a high-interest credit card, your options are a little more limited, but there are a few ways you can reduce that interest rate and achieve some financial neutrality:

1. Ask for a Reduced Rate

Contact your credit card issuer and ask them if there is any way they can reduce your rate. Tell them why you need a rate reduction and make it clear that this small gesture on their part will improve your chances of repaying your debt in full. 

This is ultimately their main goal. A creditor loses a lot of money when an account defaults, so they are generally more than happy to facilitate your needs if it reduces the risk of default.

2. Use a Balance Transfer Credit Card

A balance transfer credit card allows you to move your current credit card balances onto a new card. This new card should offer you an intro APR that lasts for between 6 and 18 months, which means all of your minimum payment, along with any additional funds you have, will go towards your principal. 

This will clear your balance quickly and while a regular APR will kick-in when this intro period ends, if your balance has cleared or reduced by this point, it will have less of an impact. 

You will be charged a balance transfer fee and this fee is charged as a percentage of your balance, but it’s often just 3% to 5%, so it’s not large enough to offset the benefits these cards can provide.

3. Improve Your Credit Score

A good credit score can help you in numerous ways. Not only can it give your creditor a reason to reduce your existing interest rate, but it can also help you when applying for a new credit card. What’s more, you’ll need a relatively good credit score to get a balance transfer card with a limit large enough to cover your existing balances.

4. Pay Down

If your creditor isn’t offering you the reduced rate you need, give them an incentive. Offer to pay a large amount of money down if they will give you a reduced rate in return. And if they don’t agree to this, do it anyway.

As discussed already, credit card interest compounds on a daily basis and the larger your balance is, the more you will pay. If you pay down a large lump sum, you’ll greatly reduce your balance and the amount of interest you pay over the term. This is true even if you don’t clear the balance in full.

Of course, getting that cash windfall is easier said than done, but if you ever have an unexpected windfall from a lottery win, cash rebate or inheritance, it’s worth considering.