As with most financial products, credit cards are usually heavily promoted on their interest rate, or APR. The lower the APR, the more attractive it’s supposed to be to potential customers. But is APR really the most important feature of a credit card?
Firstly, a sizable minority of people use their cards purely as a convenient method of paying for goods or services, and clear their balances in full every month. For this kind of card use, the standard interest rate charged is fairly irrelevant. It’s more important that you have an interest-free period long enough to cover the time between spending and settling your account, so you’ll avoid paying any interest at all whatever the rate. An interest free period should always be more than 50 days, with 55-60 days being common these days.
If you’re one of this group of card users, and you make a substantial number of purchases with your card every month, then you should be going for a card that rewards you in some way for using it. One of the most common kinds of reward program lets you build up points with each purchase, that can later be redeemed as discounts against purchases made in certain stores, or for receiving free gifts, wine, or dining.
Another way of being rewarded for using your card is cashback. Cards offering this feature effectively give you a discount of around 1% on everything you buy using the card, with the discounts being stored up and credited to your account usually annually. For heavy spenders who clear the majority of their debt every month, a scheme such as this may be worth more than a percentage point or two off your standard rate.
Another group of card users for whom headline APR is not too important is those who are making use of a balance transfer feature to move debt from a high interest card to a 0% introductory offer or longterm low rate deal. If you’re transferring a balance onto a card, it’s advisable not to use that card for purchases at all in order to maximise the benefit of the balance transfer offer, so again, you shouldn’t be paying any interest on purchases at all and therefore it’s irrelevant what figure the APR is set at.
So is APR completely unimportant? Not at all! Most people do in fact carry some debt on their cards from month to month, and obviously a lower interest rate means your debt will be costing you less. However, before plumping for the card with the lowest rate it’s a good idea to think about how you plan to use your new card, and whether features such as rewards, cashback, or deals on purchases or balance transfers will outweigh the benefits of an eyecatchingly low standard rate.
“This article is brought to you by Gus Woltmann”.