One of the most perplexing questions that prospective credit card applicants ask themselves is: should I try for the low-interest credit card or the rewards credit card?

For some consumers, this question is easily answered. For others, it may appear to be a coin toss.

The decision to apply for a credit card is not one to be taken lightly. As the infamous portal to impending debt, irresponsible usage can ruin one’s creditworthiness and cause years of financial hardship.

A common fork in the road for new card applicants includes a path towards low interest rates and a path towards rewards and cash back.

The crowd that never carries a balance would most likely tread towards rewards and cash back. Because credit card issuers do not charge interest when a balance is paid off entirely, this group has the luxury of not worrying about the APR.

The Safe Route

Cards that offer the opportunity to earn lucrative rewards and cash back usually come with higher APRs.

For example, the Blue Cash Everyday card from American Express has a regular APR of 17.24-22.24%. The card offers 3% cash back at supermarkets, 2% cash back at gas stations and department stores, and 1% on everything else.

Sure, the cash back is attractive but it’s a costly option for anyone who can’t pay off their balance.

Making “Cents”

An example of a scenario often encountered is when a card has a 11.99% APR with no rewards (e.g. Citi Platinum Select) or a card with 12.99% APR with 1% cash back (e.g. Citi Dividend Platinum Select).

The math wizard in us would assume that these cards are essentially equivalent. Of course, they’re not.

On a $5,000 balance (no further charges) at 11.99% APR and monthly payments of $200, the balance is paid off in 29 months and $782 is lost to interest costs.

On the same balance (no further charges) at 12.99% APR and monthly payments of $200, it’ll take 30 months to clear the balance and $862 is forfeited to interest costs. Even with the 1% cash back, the net loss is $812 – a $30 difference.

The culprit here is compounding, where the interest rate continues to apply to any remaining balance while the cash back is a one-time occurrence.

This difference can be reduced by making larger payments.

Under similar conditions as the above scenarios, at 11.99% APR with monthly payments of $500, the balance is paid off in 11 months and $295 paid in interest.

At 12.99% APR with monthly payments of $500, the balance is paid off in 11 months and $321 is lost to interest. With the 1% cash back, the net loss is $271 – actually less than the low-interest card.

However, this example should not be the single justification for choosing the rewards card.

The power to dispel credit card balances at a consistent rate is not within the capabilities of many consumers. If such a financial uncertainty may pose a problem, the low-interest credit card would be the wiser option.

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  • Sunshine25

    To me, paying interest on a credit card is not prudent. I find it best never to involve APR except when it is 0% =). A teaser 0% APR card with a sign-up bonus will give you anywhere from 6 to 21 months. That will buy you some breathing room if you are making regular payments and your total debt is being reduced each month. This allows you to redirect the interest you would have paid toward your debt instead. You can also redirect any sign-up bonus and reward rebates toward your debt. I signed up a BofA credit card while back that gave me 0% APR for 12 month and a $100 sign-up bonus. Both came in handy to reduce my debt.

  • justathought

    ..or i don’t care about APRs, i just pay it off every month. I use the cc only for purchases i might need at the moment but the funds are not available at that time or…just cause i pulled out the wrong card and pay it back as soon as i get home lol

  • Simon Zhen

    Sure, anyone who can pay off the entire balance can pay little attention to the interest rate. However, at some point (maybe many months later), you may have to use card when the regular APR kicks in. In the event that you ever cannot pay off the balance in full, it’s somewhat comforting to know that you took the measures to reduce the interest cost potential.