Here’s a piece of advice you likely won’t read anywhere else except in this article – you may not want to get a low interest credit card. Despite what you may have been told or read getting a low-interest credit card is not necessarily your best option. This is not to say that you should rush to apply for a credit card with a high interest rate but there are reasons why this sometimes makes sense. Of course, if you pay off the balance on your credit card every month it probably doesn’t make any difference whether it has a high or low interest rate because you’re not paying any interest anyway. But there is a case to be made for passing on those low interest credit cards and here it is.
1. Low interest credit cards offer fewer benefits
A good rule of thumb is that credit cards with low interest rates generally offer fewer benefits than those with higher interest rates. As an example of this, airline rewards cards that have high interest rates not only come with frequent flyer miles but they often have other perks such as priority service, checked baggage fee waivers and even an airport lounge membership. Of course, you could always have one of these cards for its benefits but then charge most of your purchases to a low-interest credit card, which would give you the best of both possible worlds.
2. Low interest credit cards offer no rewards
If you choose a credit card that offers no rewards you will have a lower interest rate than other cards that offer miles, points or cash back. This means that if you generally carry a balance forward from month-to-month then a low interest card might make better sense. On the other hand if you hardly ever carry a balance, and rarely have to pay any interest charges, you might be better off with a higher interest rate credit card they would offer you a return on your spending.
3. You may not qualify for the lowest possible rate
A lot of credit cards have a range of interest rates and the one that you get will depend on your creditworthiness. When you see an offer with a very low interest rate this might actually apply only if you have excellent credit. If not, your rate won’t be that low. If you don’t know your credit score make sure that you get it before you apply for a new credit card. The three credit reporting bureaus – Experian, Equifax and TransUnion – will give you your credit score free though you may have to jump through some hoops to get it. There are also websites such as Credit.com and CreditSesame where you can get your score free.
4. You’ll miss out on any sign-up bonuses
The credit card business is very competitive. Banks often offer new customers hundreds of dollars in miles or points just for signing up. However, when you choose a low-interest credit card you probably won’t get one of these generous offers. This is because if the bank knows you won’t be paying much interest every year, there’s no incentive for it to offer you a big sign up bonus because you will never be paying enough interest to offset the cost of the promotional offer.
5. You won’t get 0% interest
It doesn’t take a mathematical genius to realize that a card with 0% interest is better than even a very low interest credit card. Many of the higher interest credit cards offer interest free financing on both balance transfers and purchases. While there are cases where these cards might also offer a low interest rate, those that have the very lowest interest rates generally do not offer this type of promotional financing.
6. You could end up carrying a balance
If you were able to get a credit card with a very low interest rate this could encourage you to start carrying a balance. Of course, you’ll always save money if you pay your statement balance in full every month. But if you get a low-interest card and feel that it’s now okay to carry a balance forward, then the card probably isn’t worth it.
7. You could get hit with a penalty interest rate
If you fail to make a payment on time you could get hit with a high interest rate even if the card has a low interest rate. This is called a penalty interest rate and it can be as much as three times higher than your normal interest rate meaning that this could end up being incredibly costly. Fortunately, there are some credit cards that have no penalty interest rates such as Citi Simplicity and the Discover it Card. While these cards have competitive interest rates, they may not be the lowest you could find.
As mentioned previously if you do want a credit card with a very low interest rate you must have a very good credit score. But what is a good credit score? Lenders often look at credit scores as follows.
• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score
• Between 620 and 679 – Average or OK score
• Between 580 and 619 – Low credit score
• Between 500 and 579 – Poor credit score
• Between 300 and 499 – Bad credit score
What this translates into is that if you have a credit score of 620 or higher you should be able to get whatever credit you apply for. However, to get the very lowest interest rate you would need to have a credit score above 700. And, of course, the higher the score the better. The overwhelming percentage of lenders use what’s called your FICO score. It’s available only on the site www.myfico.com. However, it would cost you $24.95 a month to get your FICO score monthly as well as your credit reports from the three credit- reporting bureaus. As mentioned previously, you can get your credit score free from a variety of sources and while it might not be your true FICO score it should be close enough that you would be able to see how creditworthy you are. It should also tell you whether or not you would be able to qualify for a very low interest credit card.
If you’re in a financial position where you need to carry a balance forward from month-to-month then a low interest credit card might be your best bet, as it would save you the most money. Conversely, if you never or rarely carry a balance forward you might be better served getting a higher interest rate credit card that comes with perks such as cash back, airline miles or points. We know of people that will put a big ticket item on their credit cards to earn cash back but then turn around the next day and send a payment to the credit card issuer to cover the cost of the item to avoid having to pay any interest. If you could afford to do this then a higher interest rate might be a better deal than a credit card with a very low interest rate.