Rewards credit cards are wonderful when you’re able to pay in full each month. But if you start carrying a balance, those cards may be a liability. There are a number of reasons you may be facing interest; unexpected decreases in income, medical emergencies or unanticipated car repairs are some of the most common ways people find themselves behind the financial ball.
Any number of things can throw off a well crafted plan. And when that happens, your rewards credit card earning you so many rewards could turn into a liability before your eyes. Sometimes, it’s better to go simple and stick with a card that foregoes rewards but offers a low APR instead.
Why Your Rewards Card Isn’t the Best Option
Interest rates are on the rise, so trimming interest payments wherever possible could have a huge impact on your expenses. In August 2022, the average interest rate for credit cardholders with a balance was 18.43%.
Consider the current APR for a few popular rewards cards:
- Bank of America® Travel Rewards credit card: 17.49% - 27.49% Variable APR on purchases and balance transfers
- Blue Cash Everyday® Card from American Express: 18.49%-29.49% Variable (Terms apply, see rates & fees)
- Capital One Venture Rewards Credit Card: 20.24% - 28.24% (Variable)
- Citi® Double Cash Card: 18.49% - 28.49% (Variable)
- United℠ Explorer Card: 20.99% - 27.99% Variable
These cards offer variable rates, but don’t assume you’re getting the lowest offered APR. Most credit card rates are variable and determined by the federal prime rate and your credit score. Unfortunately, carrying a balance is one of the factors that can cause your credit card provider to raise your rate. Carrying more debt can lower your credit score and provide incentive for an interest increase.
Evaluate Your Interest Rate
If you have a variable interest rate, your APR will change month to month. You may have originally paid attention to your APR when you received the card, but it’s probably changed rates countless times since you opened the account.
The good news is your card provider is required to list your current interest rate on each credit card statement. Take the time to check the current APR on any credit cards. If you have multiple cards, take note of which card currently offers the lowest interest rate. And if you will need to carry a balance, use the card with the lowest APR.
Crunch The Numbers
Credit card interest compounds daily and compounding interest is particularly difficult to calculate. Do yourself a favor and avoid the mental math. PowerPay is a free calculator from Utah State University. This tool allows you to calculate interest and determine the impact of additional payments.
How Much Does Interest Really Matter?
Considering that most rewards credit cards offer 1% to 5% back in cash or rewards, paying even a very low APR of 14.99% negates your earnings. But interest may add up more quickly than you think.
Consider the average credit card balance of $5,270 with a minimum payment of $110 each month. If you regularly pay on time, but only make minimum payments, your interest could shock you.
These 10 interest points mean a difference of 4 years in payments and an additional $5,532.97 in interest.
Save Even More
Just an extra $20 each month can have a tremendous impact.
Even when your interest is high, increasing your payment from $110 to $130 each month could reduce your time to payoff by 13 to 39 months and save nearly $417 to $3,017 in interest.
Move to a Lower APR Card Instead
Whether you carry a balance or not, it may be wise to consider adding a low APR credit card to your wallet. Before applying for a new card, make sure it doesn’t have an annual credit card fee. Remember, this is a no to low frills card, and it may just sit unused, in your wallet, when your bank account is healthy.
Credit unions often offer the best rates, so consider your local CU’s credit card.
- Alliant Visa® Platinum*: 14.49% - 26.49% variable
- BECU Visa Credit Card*: 11.74% - 23.74% variable
- Bellco Visa Platinum® Credit Card*: 13.75% - 21.00% variable
- Elevations Visa Credit Card*: Starting at 12.49%
Ask for a Better Deal
If your variable APR is on the higher end, you may want to call your issuer and ask for a better rate. It may sound crazy, but if you’ve made regular, on time payments or have a good credit score, you have some serious negotiating room. Dropping your APR by even 1 to 2 points could save you hundreds of dollars.
Are Balance Transfers Too Good To Be True?
Most balance transfers, even on those magical 0% introductory APR offers, charge a minimum 3% fee on any transferred balance. That’s a fee of $158 on the average consumer credit card debt. And if you are unable to pay off the balance transfer in full before the introductory period ends, you’ll owe interest on the unpaid amount.
Before considering a balance transfer, make sure you read the fine print. If you’re looking to reduce your principal and total interest paid, some low APR cards have more favorable balance transfer fees.
Bottom Line
If you’re carrying a balance, your rewards credit card’s high interest rates may be costing you a fortune. Consider switching to a lower APR card. Even if you currently pay your statement in full, seeking out a card with a lower APR may save you if emergencies arise. Low APR cards aren’t always well advertised, but your local credit union is a great place to start.
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