The average bank issued credit card in Canada has an interest rate of 18%. Department store credit cards start around 22%. And yet every day you probably get a letter advertising “6.9% introductory rate”.
How do you get these low rates? First, you could apply for a low rate card. But beware of the credit card company tricks:
- The low rate advertised may only be an introductory rate. They may guarantee it for six months, but after the six months is over, the rate probably goes back to the typical 18%.
- Many credit cards carry an annual or monthly fee. If you carry a balance of $1,000 each month, an annual fee of $50 adds 5% to your interest rate. In our example, a 6.9% interest rate with a $50 annual fee is actually the equivalent of a no fee 12% interest rate credit card.
- Many cards charge balance transfer fees if you are transferring a balance from another card. As an example, a $35 balance transfer fee on a $2,000 transfer adds 1.75% to your interest rate over the course of one year.
- Credit cards may charge different rates on cash advances and purchases. Your low introductory rate may only apply to the balance transfer itself, not any future purchases.
- Finally, the grace period between when you use the card for a purchase, and when the interest charges begin, will vary from card to card, and that may increase the cost you pay.
The moral of the story?
Read the fine print. If you do take advantage of a low introductory rate, be sure you understand all the costs, not just the attractive interest rate.
Special offers are one way to reduce the interest you pay. But there may be an even better strategy. Read our article on how to Lower Credit Card Interest Costs.