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Low-Interest Credit Cards
 Jul 29, 2004

Nobody wants to pay high interest rates. This article will provide information on 0% interest credit cards, warning about annual percentage rates (APR), low interest credit card offers, and the advantages of low interest credit cards.

One of the most sought after credit card types is the low-interest credit card. Low-interest credit cards are desirable because the lower the interest, the less "extra" money you pay to the issuer for the privilege of borrowing the money. Low-interest credit cards are often considered to be those that have annual percentage rates below 15%.

Advantages of low-interest credit cards

The obvious advantage of low-interest credit cards is that you do not have to pay as high a financing fee. If you have a balance of $1,000 and you have a low-interest card at 11% APR, then you are paying $110 per year in interest. If that same balance is on a card with high interest say around 19% -- you will be paying $190 a year. That's a difference of $80. Over time, you can see how that adds up.

Low-interest credit cards also provide advantages for those who are trying to reduce their debt. With credit card payments, your interest charge is taken care of first, and then what is leftover goes to the principal. On your $1,000 balance, if you make a monthly payment of $50, with a card of 11% interest, $9.17 goes toward interest. Your principal is only reduced by $40.83. With a higher interest card, that payment is even less effective. $15.83 goes to interest each month with a 19% interest card, reducing your principal by only $34.17. You will pay off your debt much faster with low-interest credit cards.

0% APR credit cards

0% APR credit cards are the most sought after of low-interest credit cards. These cards are most popular amongst those trying to aggressively reduce their debt. Higher interest debt is transferred to these low-interest credit cards, and the entire payment goes to the principal. This allows those in debt to make more efficient headway in debt reduction.

It is important to note, though, that most 0% APR credit cards offer this great rate on an introductory basis. The 0% only applies for a short period of time, usually for between six months and 18 months. Also, some 0% APR credit cards only offer the deal on new purchases. Make sure you read the fine print before getting one of these cards; you want to make sure that your balance transfers will also be 0% interest.

Interest rate warnings

It is important to realize that low-interest credit cards and 0% APR introductory rates are not always easy to maintain. You should understand that rates can change almost at any time. Issuers can raise or lower their rates, changing how much you owe. And, if you are not careful, you may find yourself paying a default interest rates.

The default interest rate is one that is charged if your account moves out of what is considered good standing. If you make a payment late (or miss one altogether) or if you go over your credit limit, your interest rate may go up. The default rate is usually much higher on the order of between 29% and 34%. If you make a mistake, your introductory period will likely end immediately.

Also, note that in some cases, if your credit rating changes, your interest rate can go up. It probably won't go up to the default rate, but changes to your credit could meant a two to three point increase in your interest rate.

Reduction in availability of low-interest credit cards

With interest rates in general declining, one would think that this would transfer to credit cards as well. And normally it does. Most credit card interest rates are set using the prime rate as a base. The prime rate is the Fed Funds rate plus three points. If the Fed rate is 1%, then the prime rate is 4%. Credit cards express their rates as prime plus some other number. An 11% credit card is one that is set at prime plus seven, while the 19% card is set at prime plus 15.  If interest rates go lower, normally credit card interest rates do as well.

However, right now things are a little different. Some credit card issuers are raising their interest rates. So the prime plus seven rate may now be prime plus nine. Additionally, fewer issuers are offering 0% APR credit cards. Instead, they are offering introductory rates of between 1.9% and 5.9%. It is also increasingly difficult to find intro periods of more than six or nine months. The 12 and 18 month periods have all but disappeared.

Credit requirements are also tightening for low-interest credit cards. Issuers expect applicants to have higher scores and higher incomes than they have been requiring in the past. This means that getting low-interest credit cards has become much more difficult overall.

Related Article: Online Credit Cards >>

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