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Low Interest Credit Cards Aren’t Always The Best Option

It’s a no-brainer that the lower a credit card’s interest rate, the better, right? Well, not so fast. It turns out that low interest rate credit card offers are not always the best option. While this seems counter-intuitive, it is a really important consideration when evaluating credit cards. To understand why, consider the following:

  • A credit card’s interest rate only matters if you have a revolving balance. Pay off your card every month, and you pay no interest at all, regardless of the interest rate.
  • Many low interest credit cards do not offer other card features, like cash back or travel rewards, or they offer these incentives in lower amounts than other cards.

To see this in action, let’s take a look at two card offers: Iberia Visa Classic and Discover® More card. (Update: the Discover® More card is no longer available and has been replaced by the Discover it® card, which you can explore here.)

  • The Iberia Visa Classic offers one of the lowest interest rates available from a credit card. Based on your credit, you might qualify for a rate of either 7.25%, 10.25%, or 13.25%. The card comes with an introductory rate of 0% balance transfers for 6 billing cycles months, but no other rewards.
  • Discover® More comes with an interest rate ranging from 10.99% - 20.99%* (Variable), depending on the cardholders’ credit history. At those rates, the Discover® More card charges an interest rate roughly 2x to 3x more than the Iberia card. But it comes with much richer rewards. The card offers an introductory rate of 0% for 14 months*. It also comes with rich cash back rewards as high as 5% to 20%.

So as between Iberia Visa Classic and Discover® More, it’s the higher interest rate card that would be best for many who pay off their card each month. In fact, even the occasional revolving balance for a month or two may still favor the higher rate Discover card.

Why do higher interest rate cards often offer better benefits? The simple answer is that with higher interest rates, the card issuer has more revenue that it can use to fund richer reward programs. Cards with rates as low as 7.25% can’t offer the same rewards and still turn a reasonable profit. Of course, if you regularly carry a balance on your card from month-to-month, than the lower interest rate card is probably the best bet.

There are, however, some cards that offer both lower interest rates and rich rewards. Another good example of this type of card is the Capital One® VentureSM Rewards Credit Card. The No Hassle Miles card comes with an interest rate between 13.9% - 20.9% (V) and offers up to 2x miles for every dollar spent.

Generally lower interest rate cards offer fewer rewards, but you can find offers like the Discover More Card and the Capital One® VentureSM Rewards Credit Card that give you the best of both worlds. So if you pay off your card each month in full, remember that the interest rate on the card may not be the most important consideration.