Credit Cards: Low APR or Great Rewards?
Not all credit cards are created equal. Before you fill out that application form, ask yourself these five questions to ensure you choose the right credit card.
Got your eye on a new entertainment center? Looking to get a little cash back to counteract what you’re spending at the pump? Either way, you’re probably considering some credit card offers. But how do you decide between a card with a low interest rate and one with a great rewards program?
Here are five questions you should ask yourself when choosing a new credit card:
1. How are you going to use it?
You may opt to get a card with a low annual percentage rate (APR) when you want to purchase an item or service you can't pay for outright, like a new TV. This means you'll more than likely carry a balance on the card from month-to-month. In that case, you'll want a card with a low monthly and introductory rate.
If you intend to pay the balance of your card in full each month, worry less about the APR and more about the annual fees and reward program. If, for example, you love to eat out, choose a card with restaurant dining incentives.
2. What are the fees and penalties?
A lower interest rate on your credit card means less revenue for the card issuer and, consequently, less incentive to provide you with bells and whistles, according to U.S. News.
It also means that the company will find other ways to turn a profit — like late fees and penalty rates. If the phrase “no late fees” on a credit card application looks too good to be true, that’s because, technically, it is.
True, you won’t actually be charged a late fee for missing a payment, but you will accrue interest on any balance carried over, as usual. In many cases, the company may apply a penalty interest rate that can be as high as 27.24%. Ouch.
With great rewards often comes great cost. Many cash back or point-based programs carry annual fees, and Investopedia suggests it’s rarely a good idea to pay them.
When in doubt, consider if the reward outweighs the entry cost. If you can earn $800 in airline points by paying a $69 annual fee, then the card could be worth it. Choose a card that offers rewards on items you actually buy, though. What good are airline miles if you fly once or twice a year?
3. How much do I plan to spend?
If you are going to carry a balance from month to month, the next thing you should consider is your credit limit. While too much available credit isn’t necessarily a bad thing, having a card with a low limit could be.
According to FICO, an analytics company that provides software that computes credit scores, maxing out your card can damage your credit. So not only are you increasing your overall debt, you’re hurting your chances of getting a good rate on a car, home or even a new credit card.
Using credit to pay for items you’d normally debit to build up reward points carries its own set of risks. Scientific studies have shown that people are conditioned to overspend when they pay with a credit card.
It takes discipline to use a credit card for your month-to-month purchases. If you know you’re only going to pull out the plastic in the grocery store, at the gas station or at the coffee shop, go for it. But the phone you think you need is going to look a lot less shiny when you see what a high APR does to the original price tag.
4. What’s the regular APR?
If you have good credit — and especially if you own a home — you’ve probably been bombarded with offers from credit card companies boasting a 0% introductory APR. While that sounds attractive, the operative word here is “introductory.”
According to Credit Card Accountability, Responsibility, and Disclosure Act (Credit CARD Act), this introductory offer period must last at least six months. After that, well, it’s up to you to read the fine print and ensure you can afford the standard APR. Either that, or don’t carry a balance!
All those points come at the cost of higher APR. Sites like NerdWallet allow you to quickly search for and compare credit cards based on a set of criteria. There, you’ll learn that the interest rate on a rewards card for someone with “average” credit can fluctuate between 19.99- 27.99%.
If you’re really not attached to all those perks, you can snag a card with an APR as low as 9.99%.
5. Do I even need the credit card?
Remember, expensive toys come and go. If you’re picking up a credit card to buy something you want, but don’t necessarily need, think twice. The more debt you incur, the more likely you’ll pay interest on it. That’s a problem you can avoid by paying out of pocket.
The only thing better than paying off a credit card balance in full each month is not carrying one to begin with. Unless you have a really good reason for choosing a reward card, you’re much better off just paying out of pocket.