Another factor to consider when choosing the right credit card is the interest rate they charge. It is wise to compare different interest rates charged by banks before applying for a new credit card. Even if you already have an existing card then researching and possibly changing it to a different credit card can save you a lot of money in the long run.

Total interest charged, however, does not depend only on the interest rate, but also on the way you are using your credit card. Therefore both factors should be taken into consideration.

(1) Intended Credit Card Use

First, we will focus on the intended use of your credit card. If you plan paying your balance in full each month then the interest rate won’t play a huge role. In this case you should opt for a credit card that charges minimum fees (described in our previous article here). But you must be disciplined and stick to the rule of paying the credit card balance full every single month. Otherwise running your credit card account will cost you lot. If, despite your best efforts, you find yourself unable to pay the full balance and start incurring interest then you should be prepared to change your credit card type. And you should do it despite undergoing some inconvenience by visiting your bank and explaining yourself why you want to change the type of your existing credit card. Saving possibly hundreds of dollars will surely be worth it.

(2) Interest Rate Itself

Secondly, we will describe how the interest rate itself works with credit cards. In different countries credit card interest rates differ, but generally they are around 20% p.a. That’s huge compared to let’s say montages where interest rates are in the range from 5% to 10%. There are low interest credit cards that may charge considerably less, like 12%, but these have higher account maintenance fees.

General rule here is:

  • if you have a credit card that you pay in full every month or have a credit card with lower credit limit then choose higher interest and low transactional fees
  • if you don’t pay the credit card balance in full each month and have a credit card with higher credit limit, it’s advisable to go for low interest credit card

Another factor to consider is the way bank charge interest on their credit cards. Let’s consider a scenario that you manage to pay the credit card balance in full each month, but in some months you don’t, hence incurring interest in those months. The difference between banks comes in a way how they charge interest once you pay your credit card in full. Some banks will not charge you any interest at the next closure date. However, some banks will still charge you interest for days from the previous closure date until the date when you paid your credit card balance in full. The way in which banks handle this kind of scenario can have a huge impact on the total interest you pay. So, before applying for a credit card, check with your bank also this type of scenario.

Last, not so important factor that will determine friendliness and amount of credit card interest payments is the number of “interest free” days. Most credit cards give you 55 days, but some only 44 days. It may seem as important thing, but it’s not. Basically, it matters only at the beginning after you apply for a new credit card. Later the credit card repayments due dates will be monthly for both types, so it won’t matter much if the debt is from 44 or 55 days ago. You will be in your monthly due date cycle for both equally.

Posted on: September 13, 2013
Categories: Articles

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