Kristie Kwok
Athena Cocoves
You can use credit cards and never pay interest by repaying your closing balance every month. But if you have to carry a balance, then getting a card with an ongoing low rate could reduce interest charges. That’ll make it easier to pay off your credit card over time.
How does a low-rate credit card work?
A low-rate card has a low ongoing interest rate on purchases. This type of credit card prioritises cost savings ahead of features and rewards and typically offers competitive annual fees.
They work the same way as traditional credit cards, usually with an interest-free period of 44 or 55 days. If you pay off purchases by the statement due date, then you won’t pay interest on them.
Types of credit card interest rates
Different interest rates apply to different credit card transactions.
Promotional, honeymoon or introductory rate
A common strategy lenders use to encourage new user sign-ups is to offer a cheaper rate for a limited period — like 0% p.a. interest on purchases for 12 months. Promo offers on interest-free or zero-interest cards can be useful for spreading the cost of a big-ticket item over the intro period. Generally, the reduced rate starts when your card is activated.
Purchase rate
The purchase rate is the standard interest rate applicable to the things you buy after the honeymoon period ends and is expressed as a variable rate per annum. A low ongoing purchase rate can save significant interest over the long term. According to the Reserve Bank of Australia, the average standard credit card purchase rate is 19.94% p.a.
Balance transfer rate
The balance transfer rate is a cheaper rate — even 0% p.a. — offered to new customers who transfer an existing balance from another credit card. It usually applies for six to 36 months, potentially reducing interest payments on your debt and helping to pay it off faster. If you have multiple credit card balances, consolidating your debts into one account could also make repayments easier to manage.
But bear in mind the interest rate reverts to a higher rate after the balance transfer period ends. If you haven’t paid off the balance by then, you could end up even worse off.
Cash advance rate
The cash advance rate is charged on the cash withdrawn from your credit card at an ATM. It’s almost always more expensive than purchase rates. It’s charged from the day of the transaction with no interest-free days. Cash-equivalent purchases, like loading money onto a prepaid card, buying a lottery ticket, and money transfers, also attract this higher rate.
» MORE: How is credit card interest calculated?
How to get a low-rate credit card
It’s a good idea to compare the following key credit card features when choosing between cards with similar low purchase rates:
- Minimum and maximum credit limit
- Interest-free days
- Minimum repayment
- Digital wallet payment
- Fraud protection
- Fees (such as annual fees, late payment fees, international transaction fees, balance transfer fees, cash advance fees, over-limit fees and other account fees)
Eligibility requirements to get a credit card vary, but you’ll probably need to have proof of your residency, a permanent address and an employment income. You’ll also be assessed on your ability to borrow. So, you should check that your credit report is accurate and make sure you’re paying off bills and other debts on time.
Most lenders allow you to apply for a credit card online. While some will give you an almost instant decision, you’ll likely have to wait a few days longer. If your application is conditionally approved, it means full approval is subject to verification of your identity and financial situation.
Pros and cons of a low-rate credit card
Most lenders include a few extras on no-frills credit cards to keep costs low. As such, you’re unlikely to find a rewards program or perks like complimentary insurance. If you’re looking for additional features and plan to pay off your full balance each month, then a rewards credit card could be a better option.
Additionally, cash advances may be blocked on some low-fee cards, and international transaction fees usually apply.
With these drawbacks in mind, what is a low-rate credit card’s biggest benefit, and why would you consider getting one?
The answer is the potential to save interest if you need to spread out the cost of your purchases.
Let’s say you owe $6,000 on a credit card that charges interest at 19.94% p.a., but you can only repay $250 each month. In this case, it would take two years and seven months to clear it, at a cost of $1,555 in interest.
However, if your credit card charges a lower rate, like 12% p.a., then you can clear the same balance in just over two years and pay half the interest at $711.
So while a low-rate credit card has simple features, you could save money while enjoying payment convenience and basic benefits like interest-free periods and fraud protection.
Alternatives to a low-rate credit card
There are other types of low-cost credit cards.
Low-fee vs low-rate credit cards
Costing around $30 a year, a low-fee credit card charges half the annual fee of a low-rate card. Many lenders will waive it if you meet their minimum spending requirements, usually between $1,000 and $5,000. Purchase rates on low-fee cards are higher than their low-rate cousins, so you could pay more interest for carrying a balance from month to month.
Other types of cheap credit cards
- A no-annual-fee credit card is similar to a low-fee card, but you won’t pay anything for account maintenance. Again, it carries a higher purchase rate, so it’s important to repay your monthly closing balance. Many credit cards offer only a $0 annual fee for the first year.
- A zero-interest credit card charges a flat monthly fee instead of interest. Some lenders will waive the fee if you repay the previous month’s balance in full and on time. Credit limits on these cards tend to be low; cash advances or balance transfers may not be permitted.
- A student credit card, or a card suited for beginners, will also have limited perks and low credit limits but few fees and lower interest rates.
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