Low APR or rewards: Which is better?

Written by
Geoff Williams
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It’s a question that anyone who wants to apply for a credit card wrestles with – with no easy answer. However, a good rule of thumb is to consider your overall relationship with cash. Your decision on whether you should focus on credit cards with low APR or rewards cards really comes down to these few key factors:

  • How much of a balance you intend to carry each month
  • How much you intend to charge on your card every year
  • The interest you could accumulate by using credit instead of cash for specific purchases
  • The rebates or perks you’ll earn by running most of your expenses through a rewards credit card

The answer is going to be different for everyone, but you will want to ask yourself some questions first. Let’s dive in.

Am I going to carry a balance on the credit card?

If the answer is “yes,” and especially if the balance is pretty significant, then odds are, you want to focus on credit cards with low APR. The higher your APR, the more interest you’ll pay each month on revolving balances.

Something else to consider: 0% balance transfer cards are a good option for someone who already has a large balance and needs some time to pay it off interest free.

For instance…

  • The CardName offers intro 0% APR for 21 months from the date of the first transfer (all transfers must be completed within the first four months) before regular RegAPR APR applies. BalanceTransferFees Citi is a CardRatings advertiser.
  • With the CardName, you have up to 18 months to pay off transferred balances. After this introductory period, regular RegAPR APR applies.
  • CardName is another solid balance transfer option, with 0% intro APR on balance transfers for the first 18 months from account opening, then RegAPR APR.

None of these cards have annual fees, and depending on your credit worthiness, you could qualify for a low ongoing APR for any new purchases you put on the card.

And if you don’t have a balance, but you suspect there’s a large purchase or multiple expenses on the horizon – maybe you’re going to finally replace your refrigerator or all of your appliances are in need of updating – credit cards with an introductory 0% APR should be considered for someone who wants extra time to pay off new purchases interest free. Better yet, many of these cards have no annual fee.

Will I pay my balance off every month?

If you plan to pay your balance in full and on time each month, a higher APR won’t matter so much. If you’re supremely confident that you can make your payments in full every month, then there’s little need to be concerned about the APR. That said, if the APR seems unreasonably high to you or you worry about making payments, it’s probably best to keep searching for a different card.

Also, if you do carry some revolving debt for a month or two, a higher APR is probably not going to financially break you. It’s when you carry revolving debt month after month, and especially when you are only making those minimum monthly payments, that a high APR on a credit card can get to very costly.

When you know you’ll need to carry a balance, compare the net annual cost of each account by adding up a card’s annual fee and potential finance charges. Our credit card payment calculator can help you estimate the real annual cost of your prospective accounts before you make a long term commitment.

Is earning cash back, points or miles important?

If it is, you may want to look at some rewards credit cards with an annual fee, because you may find that they are well worth the cost. Still, it all comes down to the balance on your credit card.

If you need to pay off a balance, and it’s going to take months or maybe even years to do it, it’s probably better to not let yourself get distracted with rewards. The best rewards often cards come with annual fees – and earning ongoing rewards could be tempting for someone who needs to be paying off their card, not charging more expenses.

It’s more important, in other words, to pay off your credit card balance as quickly as possible rather than worry about how much cash back and perks you’re getting. You can always apply for another credit card with rewards later, after you’ve vanquished your balance.

Can I justify paying the annual fee?

There are also a lot of good low interest rate credit cards with rewards that have no annual fee, so if you’re really against the idea of an annual fee, you should be able to easily find a credit card without one.

That said, if you aren’t carrying a balance and have no revolving credit card debt, you shouldn’t completely dismiss annual fees.

If you do the math and can tell that you’re going to make enough cash back, or collect enough points or miles, to pay back the annual fee – as well as put extra revenue into your bank account – then the annual fee can be worth it. Especially if the card comes with other money-saving perks such as warranty protection or cell phone insurance.

Bottom line

Deciding between a credit card with low APR or rewards really depends on your spending habits and whether or not you plan to carry a balance. In short, if you think you’ll need to regularly carry a balance, aim for a low APR credit card. On the other hand, if you intend to pay off your balance each month, a rewards credit card could be a great way to earn on purchases you have to make anyway. Finally, keep in mind that some low APR credit cards come with rewards too, so even if you have to carry a balance occasionally, doesn’t mean you have to miss out on rewards entirely.

Geoff Williams
CardRatings Contributor

Geoff is a freelance journalist and has been since the 1990s. He specializes in personal finance and small business issues and has seen his work published with numerous news outlets including The Wall Street Journal, CNNMoney.com, Reuters, The Washington Post and Consumer Reports. He also...Read more

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