Published in: Credit Cards | April 9, 2019

Should You Focus on Rewards or APR When Picking a Credit Card?

Is it better to opt for a rewards card with a higher APR or for a card with the lowest annual percentage rate you can find? We have the answer.

Stack of colorful credit cards.

Image source: Getty Images

When you decide to apply for a credit card, you need to consider all the terms and conditions of the card to make certain you get the right one for you. There are tons of great credit cards out there, but there are also cards with terms that aren’t very favorable to borrowers -- so doing your research is key.

When you start comparing credit cards, you’ll see some cards that have generous rewards programs. You may be able to earn 5% cash back on gas and groceries, or you may be able to earn points or airline miles for using your card. These rewards can sound awesome, especially if you picture yourself being rewarded for spending you’d do anyway.

But when you look carefully at all the terms and conditions of the card, you may find that some of the cards with the most generous rewards have a higher Annual Percentage Rate (APR) than other cards with less impressive rewards programs. That means your interest costs would be higher. You may also find that cards with the lowest APR don’t have a very generous rewards program at all.

This brings up an important question: What’s most important when you’re choosing a credit card? Should you focus on the card’s APR, or should you focus on the rewards program?

What matters more: a card’s APR or rewards program?

When it comes to deciding whether to get a card with the lowest APR or the best rewards, there’s no one right answer. That’s because people use their credit cards differently.

If you’ve never carried a balance on your credit cards and you don’t intend to carry a balance on the new card you’re applying for, the card’s APR doesn’t really matter that much to you. You only pay interest if you don’t pay off your balance in full by the due date on the statement -- and that won’t happen to you.

When you’re assessing whether you’re likely to carry a balance or not, it’s important to be realistic and not aspirational. If you have never been able to manage your money so that you pay off your card in full each month, you shouldn’t assume you’ll be able to turn over a leaf just because you apply for a new card -- unless you’ve changed your spending habits and have gotten good at living on a budget.

If there’s a chance you’ll end up carrying a balance on your new card on any kind of regular basis, it makes no sense to pick a card with a higher APR just to get better rewards. The interest you’ll pay on a credit card if you carry a balance is always well above the value of any rewards you might earn.

Say, for example, you have a choice of two credit cards. One has a 13% APR and offers you 1% back all purchases. The other has a 19% APR, but you get 5% back on gas and groceries and 1% on all your other purchases. Let’s say you charge $1,000 on your card, $500 of which goes to gas and groceries.

With the first card, you’d earn a $10 reward for charging your $1,000. But, if you made just $25 minimum monthly payments on the $1,000 balance, you’d end up paying almost $320 in interest and it would take 53 months to pay off what you borrowed.  

Things get even worse with the other card, though. You’d get $30 in rewards for your $1,000 in charges, but if you paid the same $25 minimum monthly payment, you’d pay almost $600 in interest and would take 64 months to pay off what you borrowed. You’d be around $260 worse off than you’d have been with the card offering the less generous rewards.

Better rewards simply can’t make up for a big disparity in interest rates if you’re carrying a balance.

How to find a card that’s right for you

If you have reason to believe you’ll end up carrying a balance on your credit cards, choosing a card with the lowest possible APR is clearly the best choice -- as the above example shows.

Likewise, if you’re looking for a balance transfer credit card to move high interest debt to a lower interest rate, the balance transfer APR is what matters when picking which card is right for you.

Ideally, if you know you’ll carry a balance on your card, you’ll be able to find a card with a 0% APR promotion. These cards charge you no interest on purchases for a set time period after you’ve opened your card. For example, if you have a 0% APR for 12 months, when you charge items upon first getting the card, you won’t have to pay interest on the balance you carry for the first 12 months that you have the card. Likewise, if you’re looking for a balance transfer credit card, you should seek out one that has a 0% APR on balance transfers for a set time period.

If another card is offering better rewards but doesn’t give you this 0% rate, look elsewhere. But, if you’re confident you’ll always pay your card off as soon as the statement comes, then you can shop around for a card with the most generous rewards possible without paying any attention to the interest rate you’d be charged.

Of course, the best solution is always to figure out a way to avoid carrying a credit card balance. Charging things on your credit card makes every purchase more expensive when you pay interest on it. Even if you have a card with a 0% APR, that 0% APR won’t last forever and eventually you’ll have to pay for the privilege of charging again.

Living on a budget and capping your spending make avoiding credit card debt possible, so you’ll be able to shop around and have your choice of cards with the rewards program of your dreams.

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