How does Interest Rate work on a Credit Card?

When it comes to credit cards, the interest rate is one of the most crucial aspects for you – the customer. Most of us would like to keep our credit card charges at $0 if we could help it. Unfortunately, current data shows that credit card users generally carry around some balance. And this balance, along with your APR and transaction behavior, drums up your interest rates.

Although it may seem a tad bit confusing at first, your interest rate is an indispensable component of your credit cards. So, it only makes sense to have a general understanding of how they work and what they mean to you. To help you understand it better, we’ve prepared this no-nonsense guide on the key elements that make up your credit systems and interest rates.

Who can get low-interest credit cards?

How to get low-interest credit cards is perhaps, a question that most of us consider more often than not. To get straight to the point, a low interest ultimately comes down to your credit behavior and spending habits. So, in that sense, anyone who is willing to be thrifty and prudent with heir finances can eventually enjoy low-interest credit cards.

However, if you’re already in a financial situation where your interest rates are high, there are still a few steps you can take (which we discuss below). With credit card companies, the longer you take to pay your balance, the worst it gets for you. Since your interest is compounded over time, accumulated credit can really affect your finance in a bad way. To really give yourself a shot at getting better interest rates, the best bet is to boost your credit behavior. This boils down to financial management, prudent spending, and regular payment of charges.

Where Can I Get a Credit Card with Good Interest rate?

Getting a credit card with good interest rates is really a question of ‘How’ rather than ‘Where’. It’s not so much the place that matters, but the consistent diligence you show in your spending. This automatically means paying your interests on time and maintaining healthy cash-flows.

However, if you consider ‘Where’ you might find better rates, the right place to start is your own credit company. With the right information and attitude, you can approach your credit company and negotiate for better rates. Here are some factors that can give you more negotiating power:

Check out your credit company’s competition

Shop around for the different rates and offers that other companies are providing to customers. When you find better deals, it can work for you in two ways. First, you can use this information as leverage when you talk to your company. Their first priority is to retain customers. So, you have some weight behind you when you request lower interest rates. Secondly, if you ever have to shift services, you have an alternative to fall back on.

Get your oldest credit card

Credit companies tend to value customers who’ve been with them for a long time. Or at least they want to be seen that way. You can get in touch and request more considerate rates citing your loyalty over the years.

Consider transferring your balance

IF you find a company that offers zero introductory fees, you can consider a balance transfer. This transfer works as a consolidated debt payment model. If the rates are better in this option, it makes more sense for you to make the transition. Debt consolidation is a viable option for financial pickles that are hard to breakthrough. However, it is always advisable to try and negotiate with your existing bank/company before you consider a transfer on this scale.

What to Consider Before Applying For a Credit Card

There are several components of credit cards that you should know before you apply for one. These are essential elements that determine what benefits you get, how much you pay, etc. Let’s get a better understanding of what each part means for you.

  • Annual Percentage Rate (APR) – The APR is essentially the total amount you have to pay for borrowing the money (credit). The APR appears as a yearly rate, but it is translated into monthly amounts in your payments. Most credit companies do not charge interest if you can clear your monthly dues on or before the scheduled dates. We’ll explain this in more detail below.
  • Minimum Repayment – Most of the credit card companies will allow you to pay only a minimum amount if you cannot cover the whole balance for the month. It’s usually a fixed figure or a small percentage of the balance. Whatever the case, you should not rely only on this to get through. Minimum repayments typically cannot cover even the interest amount, so you end up paying much more later.
  • Financial Charges – Financial charge, here, stands for what we might otherwise call interest rates. The point is to differentiate it with APR. This type of charge will be calculated based on late payments, going over the credit limit, using the card outside the country, etc. Carefully read your credit agreement to learn more about these details.
  • Introductory interest – These are the introductory offers that banks/companies will offer you when you first start using the credit facility. They are usually kept at low rates to attract new applicants and customers. You should find out what the regular rates will be after the introductory period.
  • Other Benefits – These include loyalty rewards or cash-back incentives. Loyalty rewards may consist of redeemable points that you can use to shop or purchase items. And cash-back offers may be available under certain conditions (E.g. You paid all your dues on schedule). Whatever the apparent benefits, check if they’ll be useful to you and if you can meet the conditions required.

Interest and APR – The Difference

There’s a general misconception that interest and APR both mean the same thing when it comes to credit cards. While this is partly true, the two concepts are still distinct entities. Instead, interest rates are formulated based on the APR.

If you have a balance yet to be paid, the daily average is multiplied with a daily value of APR (APR divided by 365). The figure that appears for each day is then summed up. This rate becomes the interest rate that you pay. So, although interest rate and APR are intrinsically related, they are not the same thing.

The best practice with APR and interest is to clear all your dues on time. Credit companies generally provide an interest-free phase or grace period. This is the phase where interest is not charged, provided you clear the balance before the appointed time. This practice is virtually the only way to get an interest-free experience with your credit card.

Personal Loans – An Alternative

While credit cards are a convenient way to secure purchasing-power, they’re can also easily lead to debt cycles. There’s a reason why they’re called ‘Revolving Debt.’ Once you get trapped in the usually high-interest rates, it becomes almost impossible to break through. Unless you’re incredibly diligent with finances, a credit card may not be the most advisable route. Personal loans, on the other hand, come with more flexible and reasonable terms of the arrangement.

With personal loans, you’ll most likely pay lower interest rates over time. One clear advantage here is that you get the money upfront. This means you can invest or cover the specific expense ahead of you. With credit cards, it becomes difficult to track the total amount you’re paying each year. With multiple smaller components, credit interests can accumulate in no time. With a personal loan, the amount you receive and the interest you repay are straightforward. So, you know your odds and benefits from the start.

Another great way to utilize a personal loan is for debt consolidation. Imagine being stuck in a credit card debt cycle that is poised to get worse. A personal loan can mobilize your debt into one source that is easy to track and lower on interest.

Summary

So, how do I get a low-interest credit card? Simple; you boost your creditworthiness through frugal spending and prompt repayment. Responsible management of finances will allow you to keep your credit debts in check and still have the required purchasing power.

To ensure that your credit card benefits outweigh the interest rates, here are the takeaways:

  • Try to consistently make full payments each month. Recurring balances on your credit will build up to unmanageable levels later.
  • Make payments on time. Every time you exceed the due date while paying, there are interest rates that reflect your tardiness. Keep payments prompt and timely to ensure a good credit history.
  • Never max out whatever credit limit you have. Keep your expenses well below your credit ceiling. Do not let your balance exceed 30% of the credit limit. For example, if your limit is sealed at $200, your monthly balance should be well below $60.
  • As far as possible, try to refrain from making cash advances. Advances are cash withdrawals you make from your credit card, and they attract a higher interest rate.

If used correctly, your credit card can help you build a good credit history, earn rewards, and maintain purchasing-capacity. So, spend wisely, and you’ll reap the benefits sooner than later.

Quick Stats

Highest AmountLifeLoans - $40,000

Loan Terms up toQuickLoanLink - 7 years

Recommended income$2,000+ per month

Grace Chen
Article written by

Grace Chen

Grace Chen has 10 years of experience in the financial field and have been delivering excellent business content through her articles.

Grace graduated from the Haas School of Business, University of California and is currently the chief editor of Communicate Better where she has written and edited thousands of articles published in various media.