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Published February 7, 2023

What Is A Low Interest Rate Credit Card?

No-frills option for people who can’t always repay their full balance each month.

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 and make it easier to pay off over time.

How does a low rate credit card work?

A low rate card has an ongoing low interest rate on purchases. These cards prioritise cost savings ahead of features and rewards, and typically offer competitive annual fees.

They work the same way as traditional credit cards and usually come 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 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. An 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 them 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The cash advance rate is charged on the cash withdrawn from your credit card at an ATM.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 to a prepaid card, buying a lottery ticket and money transfers also attract this higher rate.

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, overlimit fees and other account fees)

Eligibility requirements vary, but you’ll probably need to have proof of your residency, a permanent address and an employment income.

As you’ll be assessed on your ability to borrow, 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 low rate 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 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 insurances. 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, as well as 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 a $0 annual fee for the first year only.
  • 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.

About the Author

Kristie Kwok

Kristie Kwok is a personal finance expert at NerdWallet. She has covered personal and business finance for almost 10 years. She is a qualified chartered accountant and has previous work experience in consumer banking, investment banking and taxation. She also has a Bachelor of Commerce degree, specialising in accounting and finance. Kristie became a writer to combine her passion for words with her in-depth industry knowledge. She is based in Melbourne, Australia.

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