Saving on interest expenses with low-interest and 0 percent APR credit cards

By Ben Woolsey

The best way to save money with credit cards is to pay off your credit card balance every month and only spend what you can afford to spend. Paying off the balance on your credit cards every month lets you avoid interest expense and finance charges. It’s like getting an interest-free loan.

But what about those of us who, for one reason or another, carry balances on our credit cards? Is there a way to save money on a revolving balance?

Fortunately, there is. All the major credit card companies (Visa, MasterCard, AmEx, and Discover) offer a wide variety of credit cards, but not all the interest rates are the same.

Two ways to save
There are two kinds of offers usually offered. The first is the special 0 percent introductory APR (annual percentage rate). This is where the card gives you a 0 percent interest rate for a short time and then raises the APR after that time is over (usually 6 months). Another option is a lower fixed-interest credit card -- how low “lower” is depends on how high the interest rates on your current cards are presently.

How much money can a low interest credit card save you?
Let’s compare the difference between an 8 percent fixed interest rate versus a 20 percent fixed interest rate.

Let’s say you carry a balance of $1,000 for a year on your credit card for a full year. One at a 20 percent fixed interest rate, and your interest expense is $200.

$1,000
x .20
--------
$200

But on an 8 percent fixed-interest credit card you would only spend $80 in interest expenses.

$1,000
x .08
--------
$80

So, by going with an 8 percent card over a 20 percent credit card, you are saving $120 a year.

This doesn’t even include the money you will save in finance charges. Let’s also look at how a 0 percent introductory offer can save you money. Let’s compare the credit card with a 20 percent fixed interest rate with a card that gives you 6 months at a 0 percent rate but goes up to 25 percent afterward. Again, let’s assume you carry a $1,000 balance over a year.

On a 20 percent fixed interest rate , you will spend $200.

$1,000
x .20
--------
$200

But let’s look at the numbers on a card with a higher normal rate but with a lower introductory APR:

It is $250 for one year at a fixed APR of 25 percent.

$1,000
x .25
--------
$250

But the first 6 months is 0 percent. So, we can divide that by 2 and we have $125. So, you save $75 going this route. But for the sake of your credit, it is best to use this ONLY as a short-term solution. All the major cards—Visa, MasterCard, American Express, and Discover, have these kinds of offers.

As you can see, 0 percent APR cards and low fixed rate cards can save you money over time. Remember: The BEST way to save money is to pay off your cards monthly. But getting a low interest credit card or a credit card with a low introductory rate is one way to save you money in interest expenses if you have to carry a balance.

Published: October 18, 2005

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