Your credit card interest rate influences how much you pay for carrying a balance on your credit card. The interest rate directly influences your monthly finance charges. You’ll notice finance charges on your credit card billing statement any month you carry a balance from the previous month. (You can avoid finance charges completely by paying your balance in full each month.) On a low interest rate credit card, you'll get the benefit of a low finance charge.
Lower Interest Costs
A low interest rate credit card gives you the benefit of lower finance charges. For example, if you have a low interest rate credit card with a rate of 11.9% and a balance of $500, you’d pay a $4.95 finance charge. But, if you make an additional $500 purchase, your balance increases to $1,000, and you’ll pay a $9.92 finance charge.
When your interest rate increases, you pay more interest. At an interest rate of 21.9%, you’d pay $9.13 finance charge on a $500 balance and $18.25 on a $1,000 balance. You pay more in finance charges when your interest rate increases. Keep in mind that you get nothing tangible for paying finance charges. You’re simply paying for the convenience of paying your credit card balance at another time.
Less Time to Pay Balances
A low interest rate credit card has a lower balance payoff time. Let's say you can only afford to pay $50 on your credit card balance, regardless of your interest rate. You’ll pay off a $1,000 at 11.9% in 23 months with a total of $107.68 in interest paid. If you lose your low interest rate and the rate increases to 21.9%, it will take you 25 months and $227 in interest to pay off the balance. You’d have to increase your payment to $90 a month to reduce your total interest paid to $105. With that payment, you’d pay off your balance in 13 months.
Lower Minimum Payment
Depending on how your credit card minimum payment is calculated, you might end up with a lower minimum payment on a low interest rate credit card. Some minimum payments are charged as a percent of the outstanding balance (plus fees). An interest rate increase won’t affect your minimum payment in this case. Other minimum payments are calculated as a percent of the total balance plus the finance charge. If this is how your credit card issuer calculates your minimum payment, then a lower interest rate would mean a lower minimum payment. Your minimum payment could become unaffordable if your interest rate increases.
If you're at risk of losing your low interest rate credit card, you can use a credit card payment calculator to see how a higher interest rate will affect you in terms of length of time to pay your balance and total interest paid.