A low APR card can ease the strain of having to clear your debt by a fixed deadline
Whether you’re looking to spread the cost of purchases without lumbering yourself with a high rate of interest or you want to pay off existing expensive debt, a low APR credit card could come in handy.
Here, we explain how this type of plastic works and what to look out for.
How do low APR credit cards work?
Unlike credit cards that offer an interest-free (or 0%) deal for a limited period, a low APR credit card offers a low rate of interest for the life of the card. This means there is no deadline by which you need to have cleared your debt before the interest rate is hiked.
APR stands for annual percentage rate and is used to compare credit cards and loans. It takes into account the rate of interest you’ll pay as well as any additional charges or fees.
The rate on a low APR card isn’t fixed, so it can increase or fall. But it will continue to be offered at a rate significantly below the market norm.
Often the rate of interest charged is around 7.9% to 9.9% APR, compared to the 20% to 23% APR typically charged by standard credit cards.
The low interest rate will usually apply to both purchases and balance transfers made on the card, but it can also apply to money transfers (where you move funds from your card into your bank account) and cash withdrawals.
Some low interest credit cards also offer an interest-free period on purchases or balance transfers for two or three months before then reverting to the low APR.
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Who are they suitable for?
Low APR credit cards can be an alternative option if you are struggling to get accepted for an interest-free credit card. They are also worth considering if you would prefer not to have the pressure of clearing your balance within a set timeframe – as you would with a 0% credit card.
You can typically use a low interest credit card for purchases, balance transfers, money transfers, and even cash withdrawals. However, it’s best to check whether the low rate covers all of these transactions first as interest rates may vary.
What are the advantages?
If you regularly struggle to pay off your credit card balance in full each month, a low APR credit card can help reduce the amount of interest you pay. This will save you money and help you to clear your debt faster.
Although credit cards that charge no interest at all for a set time are usually a cheaper option, the downside is that as soon as the 0% period ends, you’ll start paying interest on any remaining balance, and this can be expensive.
To avoid paying this high rate of interest, you’ll need to switch to another 0% balance transfer card and (usually) pay a balance transfer fee.
With a low APR credit card, on the other hand, there is none of this switching hassle. You simply spend on the card or transfer over an existing balance and pay one low rate until you’ve paid off your debt. This can also have a positive effect on your credit rating as regularly switching credit cards can bring your score down.
Using a low APR credit card can also make it easier to budget, and many cards won’t charge fees for balance transfers.
What should you look out for?
Low interest credit cards have many benefits, but there are also a number of drawbacks to watch out for. These include:
Interest rates are often variable
Although low APR credit cards have a low rate of interest, in most cases the rate is variable which means the rate can change at your provider’s discretion – and it’s far more likely to go up than down.
There may also be a different interest rate for certain transactions so you might, for example, pay a higher rate for money transfers and cash withdrawals than you would for purchases or balance transfers.
You may not get the interest rate advertised
To get accepted for the most competitive low interest credit cards, you will need a good credit score. If your credit score is below par, your application could be rejected, or you may be offered a higher interest rate. Note that the advertised APR only has to be offered to 51% of successful applicants – the remaining 49% may be offered a higher rate.
Fees can be high
As with all credit cards there are fees to watch out for. If you’re carrying out a balance transfer, many low APR credit cards will allow you to do this fee-free, but some will charge you around 3% of the amount you transfer, so always check carefully.
There is also usually a fee to pay if you withdraw cash on your credit card, and keep in mind that interest will be charged from the date of the withdrawal, even if you clear your balance in full that month.
A fee will also be charged if you’re late making a monthly payment or if you miss it completely, and your credit rating will be affected too. To make sure you remember to pay on time, it’s worth setting up a monthly direct debit.
There are cheaper ways to borrow
As mentioned earlier, a low APR credit card isn’t necessarily the cheapest way to borrow and you may be better off with a credit card that offers interest-free purchases, balance transfers or money transfers for a number of months.
However, remember – a 0% credit card will only work out cheaper if you manage to clear the balance before the interest-free deal ends. owev
Minimum payments are low – maybe too low
Credit card minimum monthly repayments are typically set at low levels – often around 1% to 2.5% of the balance. Only paying this amount each month will lengthen the time it takes to clear your balance and you’ll pay far more in interest. If you can afford to, it’s always best to pay off more than the minimum each month.
Your credit limit may not be high enough
Credit limits are usually a few hundred or a few thousand pounds but depending on what you plan to use your credit card for, this limit may not be sufficient to meet your needs.
Avoid the temptation to go over your credit limit as you will be charged a fee, and this can also affect your credit score.
What should you consider before applying for a low APR credit card?
If you are thinking about applying for a low interest credit card, it’s worth checking your credit score first through a fee-free service such as Experian, Clearscore, Credit Karma or MoneySavingExpert’s Credit Club. This will give you a good indication of how likely you are to be accepted for the best deals.
If your credit score isn’t up to scratch, there are a number of steps you can take to improve it, including:
- checking you’re registered on the electoral roll
- correcting any errors on your report
- spacing out applications by at least three months, ideally six
- paying your bills on time.
When comparing low APR credit cards you may want to consider whether a card that offers interest-free spending or balance transfers for a few months first would be beneficial – this could be particularly helpful if you’re paying for a holiday, for example, or if you’re looking to consolidate existing debt. But remember that more competitive 0% credit cards are available.
Alternatively, you may want to look for a card that also offers rewards such as cashback or fee-free transactions when you travel abroad.
Are there any other options?
If you’re not sure whether a low APR credit card is right for you, another option to think about is a personal loan. This option is usually best suited to those looking to borrow a fairly large sum as interest rates are most competitive for loans of between £7,500 and £15,000.
As well as using a personal loan for large purchases such as home improvements, a loan can also be a good way to consolidate existing debt more cheaply. Personal loans enable you to combine multiple types of debt into a single monthly payment with one lender, making it easier to manage your finances.
Monthly payments are fixed which can help you budget, and you can usually choose how long you need to repay the amount borrowed.