Credit Cards: Low APR vs. Great Rewards
You're thinking about getting a new credit card. But, choosing between a card with a low APR and one with great rewards is a common dilemma for a consumer because both types of cards provide noticeable benefits.
The right choice will vary on the consumer’s spending and debt management habits.
Trade-Offs of Low APR vs. Great Rewards
Every credit card exists to create a profit for the credit card company that issues it. With every purchase on a credit card, the consumer is taking out a loan where the lender expects to earn interest on the amount lent.
How low-interest credit cards work
Low APR credit cards charge low interest rates on balances carried over month to month, but don’t usually offer rewards. In the eyes of credit card companies, low interest rates are appealing to consumers who tend to carry a balance, thus allowing the issuer to collect interest charges.
- Usually no annual fees
- Minimizes the interest charges if you carry a balance on the card
- No rewards
- Likely to also lack amazing card perks and benefits
How rewards credit cards work
Great rewards credit cards will award perks such as cash back and points for gift cards and airline miles, but the APR will be rather high. High rewards are attractive to consumers who are frequent shoppers but do not carry high credit card balances. Instead, card companies profit from the portion of the card processing interchange fee that merchants pay for every transaction.
- Earn rewards on your spending
- Cards may come with premium perks and benefits
- The top rewards cards are likely to have annual fees
- Relatively high interest rates
- Rewards programs may be complex
Deciding on a Type of Credit Card
The determining factor for choosing a low APR credit card or rewards credit card is your tendency to carry a balance. Minimizing the finance charges on a credit card is the primary goal.
If you expect to be carrying a balance on a regular basis, a low-interest credit card would be ideal. Earning cash back on all your purchases isn’t financially wise if you are carrying a balance that is charged 15% APR, which compounds to even more interest over time.
If you are diligent in paying off your entire credit card balance month after month, a rewards credit card offers the greatest perks. It doesn’t matter if the APR is 11% or 15% because by paying off the entire balance, card companies will not charge interest and therefore nullifies the relevance of the APR. Instead, take advantage of rewards or cash back credit cards.
In a nutshell: If you don't think you'll be able to pay off your entire card balance on a monthly basis, you should opt for a low-interest credit card. Otherwise, you should get a rewards credit card.