One of the items that we’re supposed to look at when choosing a credit card is the interest rate. We’re told that the interest rate is a big deal, and that it’s important to get the lowest interest rate possible on a credit card.
But is your credit card interest rate really that important? Well, it depends. Do you carry a balance on your credit card?
Carrying a Balance: Credit Card Interest Rate Matters
For the most part, your credit card interest rate matters most if you carry a balance on your card. If you carry a balance, the difference between 15.99% rate and a 19.99% rate matters a lot. The higher your balance, the more it matters. If you carry a balance of $3,000, and it doesn’t go down each month, you would pay $479.70 in interest during the year. That same card at a 19.99% rate, though, will cost you $599.70. That’s a difference of $120.
Credit cards are designed so that if you pay only the minimum on a balance you carry from month to month, you are likely to keep paying on that card for years, and you are likely to pay thousands of dollars in interest. The result is rather discouraging. And the higher your interest, the greater the portion of your monthly payment that goes right to interest, instead of reducing your principal.
When you carry a balance, your interest rate matters. 0% APR credit cards are few and far between in Canada, but it is possible to find low-rate cards that will provide you with a low rate for three to five years so that you can tackle your debt and stop paying so much in interest.
Pay Off Your Credit Card: Interest Rate Isn’t as Important
On the other hand, if you pay off your credit card each month, the interest rate that you have doesn’t matter as much. If you aren’t carrying a balance, it doesn’t matter how high your interest rate is, because you don’t have a balance for it to be charged on.
This is a good thing, because many rewards credit cards come with high interest rates. So, if you want a rewards credit card, it is often a good idea to make sure you can pay off your credit card each month. Otherwise, the amount of interest that you pay will overset your rewards.
When you are a savvy credit card user, it’s about “gaming” the credit card system. You make planned, regular purchases with your credit card, and rack up the points. Then, because all of your spending fits in with your budget, you can pay off the card each month. You don’t pay the interest, and you have a lot of points that you can redeem for free stuff or cash back.
Your financial situation dictates how important interest rates on credit cards are to you. As long as you are smart about your credit card use, and pay off the balance each month, the interest rate on the card isn’t such a big deal. You can go for a good rewards card with a higher rate, and not worry about it.