Low Interest or No Fee

By September 11, 2015Blog


What’s Better: Low Interest or No Annual Fee?

If you have had trouble with your credit in the past, you may be feeling a little gun-shy about getting back into having a credit card. But then you realize that it ‘s hard to get by in the modern world without one. So many of the things we do every day have moved online, thus making it much easier to get by with at least one credit card.

When it comes to credit cards, there are hundreds of options. When evaluating those options, you need to keep your particular financial situation in mind. Obviously, having a card with a low interest rate AND no annual fee would be ideal, but in an either/or proposition, what’s best?

Take Advantage of Online Calculators

Of course we think everybody should avoid carrying a balance on credit cards, but sometimes life happens. Many people feel that an annual fee is an upfront cost that should be avoided, but that may not always be the case. For example, is a card with a $20 annual fee and an 11.99% interest rate preferable to one with no fee and a 19.99% interest rate?[i]

That depends on the balance and how much you’re able to pay off every month. Here’s a simple example using this online calculator:

Balance Rate Monthly Payment Annual Fee 12-Months’ Interest Borrowing Cost
$1000 11.99% 100 $20 $59 $79
$1000 19.99% 100 $0 $103 $103

As you can see, the card with a relatively small annual fee is the right choice in this case. If you already have a credit card and are carrying a balance, it may be time to consider a new card. Just be sure to cancel the old one when you make the switch!

Watch Out for Trial Periods

Some new cards offer a low introductory rate, for the first 3, 6, or 12 months after you sign up. That’s great for the initial period, but what happens next? This “bait and switch” tactic is a pretty common one, and you could find yourself saddled with high monthly interest payments when the regular rate is applied.

Evaluate Your Needs Annually

At least once a year, take stock of your credit card(s) – Do you need all of them? Are you carrying a balance on any or all of your cards? Is your financial situation better now than it was a year ago? You might be eligible for a better rate.

Though it seems strange to pay to save money, when carrying a balance, a card with a low-interest card with a small annual fee may be the way to go!

[i] Both are currently available at a major Canadian financial institution.