Source: This sudden rate change could be beneficial to those who have an outstanding credit card balance (but you may need to ask for a lower rate) or are interested in a card with a lower interest rate.
Average credit card interest rates…
- Low interest
- National average
- Bad credit
Source: ABA Q1 2020 Credit Card Market Monitor
Since you won’t accumulate any interest by paying your balance in full each month or not using your card at all, having a credit card with low interest is only important for revolvers, who make up the largest segment of cardholders.
How does credit card interest work?
You probably know that if you carry a balance on your credit card, at some point you will pay interest. Here, we explain how that works.
Your interest is expressed in APR, or annual percentage rate. According to Discover, you divide that rate by 365 (days of the year) to calculate your daily rate. So, if your card has an APR of 15%, it will have a daily rate of .041096%. So, with a balance of $1,000 at 15%, you add the interest, and the new balance the next day is $1,000.41. This continues, with compounding, until the end of the month when your balance is $1,013.
You might get a grace period of roughly a month to pay your bill off and avoid interest, and of course you can take out a 0% intro APR card as well to avoid paying interest. But the bottom line is that if you don’t pay off your balance, you can eventually get slammed with interest, and your monthly charges can drag on for years if you only pay the minimum.
To calculate interest on a credit card, use our handy-dandy U.S. household credit card debt decreased by $76 billion in the second quarter of 2020 when compared to the previous period, according to the New York Fed, while seriously delinquent credit card accounts (more than 90 days past due) leveled off to 5.05%.
How can I avoid paying interest on a credit card?
To avoid that debt, the best thing you can do is to pay in full each month. Also, avoid putting charges on your card that you can’t pay in full by the due date. Want that big-screen TV but don’t have the cash? Start setting aside the money rather than paying with your card without a plan.
If you’re already stuck in debt, you can avoid paying some interest by paying more than the minimum amount. Remember that $3,000 at a 16.5% rate, in which you end up with more than $2,000 in interest charges because you paid the minimum? Well, if you paid $200 a month, those interest charges would drop to $383.
If you pay more than the minimum…
|Rate||Monthly payment||Months to pay off||Amount owed||Interest to pay off|
|16.5%||3% or $25, whichever is greater||124||$3,000||$2,122|
Another way to save money on interest is to transfer an existing balance to a balance transfer card or a low interest card.
With a lower interest rate, and even better, 0% intro APR, you can pay off that card debt at a faster rate. Also, you save hundreds of dollars in interest charges.
Can you ask for a lower credit card interest rate?
There are several ways to lower your interest rate, the most direct being to simply ask. In most cases, you can call your card provider and work with them to negotiate a better rate. It’s important to stay mindful of what your interest rate is; that way there’s no surprises if you ever carry a balance.
Why you should avoid keeping a balance on your credit card
In addition to interest incurred when carrying a balance, there’s another reason why you should avoid card debt. The second most important factor of your credit score is your credit utilization ratio, or how much you owe on your cards compared to how much credit you have available. So, if you owe $500 and you have $5,000 in available credit, then your utilization ratio is 10%, which is a good ratio.
Figuring out your credit utilization ratio
|Card||Credit available||Amount owed||Credit utilization ratio|
|Citi® Double Cash Card||$2,000||$200||$200/$2,000=10%|
|American Express Cash Magnet® Card||$2,000||$300||$300/$2,000=15%|
|Discover it Cash Back||$1,000||$0||$0/$1,000=0%|
As you can see, there is a ratio for each card and a total ratio for all cards combined. Both matter. The industry standard is to keep the ratios under 30%, but it’s best to keep them as close to 0% as possible, partly to avoid paying interest and partly to keep your credit healthy.
With our picks for the best low interest credit cards on this page, we cover a unique selection of credit cards with low regular interest rates. We have also curated and compiled a list of the best credit cards with long 0% APR offers and for balance transfers specifically — check them out:
You can read some individual reviews for low interest credit cards at our reviews section. You can use these to get a better idea of how products compare to one another and decide which offer is the best for your needs.