Best Low Interest Credit Cards for February 2020

A low-interest credit card has a below-average annual percentage rate (APR) on purchases, either on a temporary or permanent basis. A low-interest credit card can save you a tremendous amount of money if you carry a credit card balance, and it can also help you pay down debt faster than you otherwise could. We've reviewed dozens of low-interest credit cards, so if you'd benefit from a lower APR, take a moment to check out our favorites.

Everything you need to know about low interest credit cards

Carrying a credit card balance isn't an ideal financial situation, but the reality is that millions of Americans do it. Total U.S. credit card debt was $868 billion in mid-2019, and the average cardholder owes more than $6,000 on their credit cards. As of May 2019, the average credit card APR was 15.13%, which implies that Americans are paying credit card interest to the tune of about $130 billion per year, or over $900 per cardholder. Getting the lowest possible interest rate can save you hundreds or even thousands of dollars every year.

The interest rate you pay on any given credit card depends on a few factors, such as your credit history and overall debt profile. However, some credit cards offer generally lower interest rates than others, while others offer 0% intro APRs for several months on both purchases and balances transferred from other cards, which is generally the best way to save money on your credit card balances. If you're looking to transfer a balance or finance a large purchase, check out our favorite 0% intro APR credit cards.

Low-interest credit cards come in two main forms:

• 0% intro APR -- Credit cards that charge no interest on purchases or balance transfers, but only for a certain period of time, typically ranging from 12 to 21 months. In addition to the 0% intro APR periods, these cards also vary significantly in terms of the fees charged and other benefits offered.
• Low permanent APR -- Credit cards with a below-average APR that isn't temporary. These still typically fluctuate with benchmark interest rates but tend to stay lower than the average APR offered. These aren't easy to identify, as credit card interest rates depend on several factors.

APR stands for “Annual Percentage Rate,” or the rate of interest applied to your balances. Most credit cards use an average daily balance method for calculating interest. Thus, the card’s APR is divided by 365, and then that daily interest rate is used to calculate interest due on balances day by day.

To illustrate the impact a lower-interest credit card can have, consider how paying $100 per month on a $3,000 initial credit card balance will reduce your debt over time:

Note: Figures rounded to the nearest dollar.

Here's the takeaway: After six months, the cardholder with a 0% APR would have reduced their debt by nearly $200 more than one with an 18% APR, even though they both paid the exact same amount of money.

We think about credit cards and their APRs in two different ways. Some cards offer exceptionally low APRs for a certain period of time (0% intro APRs on purchases or balance transfers), while others offer persistently low APRs, many times, for people who have excellent credit. These cards fit into two distinct categories because they are designed for very different purposes.

• Promotional APRs -- If you need a low APR to help finance a purchase or pay down existing credit card debt with a balance transfer, a 0% intro APR is ideal. There are many credit cards that offer a 0% intro APR for periods spanning from 6 to 18 months. The advantage to these cards is that they offer a super-low APR, but only for a short period of time.
  
• Low-interest cards -- Some cards offer consistently low APRs, usually to people who have excellent credit scores. (The credit card with the lowest interest rate will usually have an APR around 10% or so, which is in line with rates on two-year personal loans.)

Credit cards with a 0% intro APR are generally the better way to go, especially if you can pay off your entire balance before the introductory period expires. Cards with permanently low interest rates are still an expensive way to borrow money, especially with emergence of the personal loan industry over the past few years.

It can be difficult to find a credit card with a permanently low interest rate, and it's typically a better idea to obtain a personal loan if you need to finance a large purchase over an extended period of time. These have fixed rates that are often superior to even the lowest permanent credit card APRs, and set repayment periods that can let you repay your debt over a few years.

Here are some illustrative examples of when a low-interest credit card can be useful:

• Your income fluctuates -- People who have irregular income may benefit from having a low-interest credit card to help cover expenses in periods where cash flow is particularly tight. Salespeople who work on commission and self-employed individuals fit here.
• You need emergency financing -- Nothing beats having a few months of living expenses in your bank account, but having a low-interest credit card as a backup source of financing can help you digest unforeseen large expenses (like a car repair, or midnight call to a plumber) while minimizing the amount of interest you pay.

While we’d never advise carrying a balance for long periods of time, a low-interest credit card can be better than the alternatives. You would pay about $10 in interest every month on a $1,000 balance at a 12% APR. That’s far better than paying a $35 overdraft fee or getting a loan shark rate from a payday loan store.

One of the best ways to pay down credit card debt for good is to use a 0% intro APR balance transfer offer. By moving your balance from a card with a high APR to another card with a 0% intro APR, you’ll be able to pay down your balances faster because interest won’t accrue during the promo period.

To illustrate the savings, consider a scenario in which you have $5,000 of credit card debt at an 18% APR and can afford to make monthly payments of $250 toward paying down your balance. The table below shows you how you can save hundreds of dollars in interest, and have the debt paid off three months faster, by moving the balance to a card with a 0% intro APR for 15 months.

This is not an unrealistic achievement. While the industry standard fee for balance transfers ranges from 3%-5%, there are several credit cards that offer a 0% intro APR and do not charge you any balance transfer fees. For people who carry balances, 0% intro APR cards offer value in excess of the best sign-up bonus cards!

The math isn’t as favorable for people who use low interest rate credit cards in lieu of 0% intro APR cards, which is why we have a preference for cards that offer a 0% intro APR. The table below compares paying off a $5,000 balance at 18% vs. the same balance at 10%.

As you can see, paying 10% instead of 18% makes a big difference in the total amount of interest paid, but it doesn’t create as much savings as a card that offers a 0% APR for a short period of time before reverting to a standard APR of 18%.

Credit card interest can be a little tricky, but once you understand how it works, it’s actually pretty simple.

The first thing you should understand is that credit cards show interest rates on an annual basis, but most credit cards charge interest on a daily basis. So, if a credit card has an 18% APR, that means it actually carries an interest rate of about 0.049315% per day (18% ÷ 365 days = 0.049315%).

If you have a $5,000 balance, the next day the balance would grow to $5,002.70 at an 18% APR, assuming that no other purchases or payments are made. This calculation is made every day during a billing cycle. After 30 days, the $5,000 starting balance would grow to about $5,074.50 at an 18% APR.

What is a grace period?

The good news is that interest isn’t charged immediately. Most credit cards have what’s known as a grace period, or a period of time in between when a statement period ends, when the payment is due, and when interest is actually charged. An example is the best way to illustrate how all this works.

For our example, we’ll assume that:

1. You make $5,000 of purchases on March 5.
   
2. The card’s billing cycle ends on March 31, and your payment for that period is due on April 25.
   
3. You make a $5,000 payment on April 25.

If you do all of the above, you won’t pay a dime in interest. That’s because you didn’t carry a balance into the statement period, and you paid your new balance in full during the grace period.

We should point out that grace periods don’t help you if you carry a balance from month to month. That’s because carrying a balance can mean that you forfeit the grace period, and purchases immediately accrue interest. Thus, if we modify the example and assume that you had a $1,000 balance carried over into the May billing cycle, you’d owe interest on the $6,000 balance ($1,000 of existing debt plus $5,000 in purchases) you carried from March 5 to April 25.

The key thing to remember is that grace periods only help you when you always pay your credit card balance in full every single month. Even if you charge up $5,000 of purchases and make a $4,999 payment, the $1 balance you carry over can trigger the immediate accrual of interest on all subsequent purchases.

A 0% intro APR card can offer a lot of value, but you have to be careful how you use it. You’ll notice that many of our favorite cards offer 0% intro APRs on purchases and balance transfers. There’s a good reason for that: Cards that only offer a 0% APR on one type of balance can cause you to build up balances at a high interest rate while paying down balances you carry at the 0% promo APR.

The CARD Act of 2009 only requires credit card companies to apply payments in excess of the minimum payment toward the highest APR balance. This can lead to a situation where cardholders use a 0% intro offer on one type of balance and build up a different type of balance at a high APR.

Suppose you have a $4,500 balance transfer balance at a 0% intro APR, and a $500 purchase balance at an 18% APR, for a total balance of $5,000. Minimum payments vary by card issuer, but on a $5,000 balance, a $50 minimum payment would be in the typical range (most issuers require minimum payments equal to 1% of the balance plus any new interest).

Which works best to pay off debt?

If you only pay the $50 minimum payment, all of it will be applied to the balance transfer balance. Thus, your balances will change as shown in the table below.

Notice that the purchase balance grew even though you made a payment. That’s because the minimum payment that you made was applied to the balance transfer at a 0% APR, while the purchase balance was untouched, and increased due to interest charges.

The only way to avoid building up on a higher APR balance is to pay an amount equal to the required minimum payment plus the higher APR balance. In this case, you should have paid at least $550 ($50 minimum payment plus $500 in purchase balances) to make sure that no interest was charged on the purchase balance.

There are three ways to get around this potential pitfall:

1. Only use cards that offer 0% intro APRs on purchases and balance transfers.
   
2. Only use credit cards for a specific type of balance that qualifies for a 0% intro APR (don’t use a 0% balance transfer card for purchases if it doesn’t offer a 0% APR on purchases, too).
   
3. Only make payments that are equal to or greater than the minimum payment plus any balances at a high interest rate.

These three rules can save you a lot of headaches, and a lot in interest, by helping you take full advantage of a 0% intro APR offer. 0% intro APRs can help you save a fortune in interest. But if you don’t, a 0% intro card offer can put you back at square one, building up balances at high APRs.