When does getting a low rate card make sense?
Conventional wisdom says low interest rate credit cards are better than those with high interest rates. For many people that is certainly true. But for others, the interest rate on their credit cards is irrelevant. How can this be? Are these people fools?
While everyone uses credit cards differently, let's break people into 3 groups for the sake of simplicity. Those who regularly carry a credit card balance month-to-month, those who occasionally carry a monthly credit card balance, and those who never carry a balance. For these 3 groups, the importance of interest rates will vary widely. Let's take a look at how this works.
How interest rates affect various people:
- Those regularly carrying monthly balances: This group of people are significantly impacted by the rate of interest charged by the credit card company. For many, they only pay the bare minimum month after month, usually 1% to 2% of the balance plus interest. Most of the payments goes towards interest, not the principal which makes it difficult to get out of debt. If you're constantly carrying a balance getting a low rate is the most important factor when researching credit cards. (However we would recommend looking closely at your finances to see how you can avoid using credit cards and paying costly interest payments!)
- Those occasionally carrying a monthly balance: Even if you carry a monthly balance for a short period of time (say 2 months) getting a low rate is still important. There's no rewards program out there that pays enough to offset paying ANY credit card interest.
- Those who never carry a monthly balance: We believe credit cards are a useful financial tool when used responsibly. Never paying any credit card interest is a huge part of that philosophy. These people never have to worry about the interest rate because they pay off their balance in full every month. For these savvy spenders getting the most rewards is the top priority. They take what the credit card companies give them and pay nothing in return.
According to several sources, about 45% of Canadians carry a credit card balance month-to-month. Debt can hamper both near and long-term financial goals, so we encourage our visitors to use credit responsibly. If you think you might carry a monthly credit card balance even for a short time, then opt for a card with a low rate.