Are Low Interest Credit Cards Worth It?
By Daily Dosh | December 3, 2007
It may seem that credit cards can be both saviour and destroyer but ultimately you should view them purely as a tool. Of course, how you choose to use them is up to you.
Handy Tool - If used properly they can come in very handy, they can be used for online shopping where you can’t simply hand over a wad of cash. It’s also great if you feel uncomfortable about carrying large amounts of money in case you are mugged. Alternately you may use your flexible friend to run up huge debts you’ll struggle to repay and the interest rates can be crippling.
Use it for Debt Consolidation - For a number of people who find themselves with bigger credit card bills than they can cope with, debt consolidation is the answer. Many card issuers will present you with offers that sound too good to be true. Simply collect all your credit card debt onto the one card.
Be careful about these ‘low interest rates’, they are often only given to those with good credit history. And if you’re having financial troubles, chances are your credit score is less than perfect.
In saying that they can be a good long term solution and the only way to know if they’ll accept you is if you actually apply. If you are accepted there are a number of things to consider:-
End Up Paying More - It is unlikely that these credit card offers will lower the total amount owed. This means you’ll still have the same amount of debt. You may even end up paying more in the long run. If you pay 8% on a debt of $10,000 for, say, five years you will pay more than paying 10% on $10,000 for two years.
The reason is the compounding effect of interest. The total amount of interest paid in the first case is $2165.60. The net interest rate overall is 21.656% when calculated as the percentage paid beyond the principal. In the second case, you pay only $1074.80, with a net interest rate of 10.748%.
It’s important to note that you are paying an annual percentage rate (APR) which means this is the amount you pay each year - it is not the total you pay over the life of the loan,
The advantage of paying 8% over five years is that the monthly amount is only $202.76 compared to $461.45 per month if the interest rate is 10% over 2 years. Think about what you can afford to pay after all your other expenses. Use one of the many online calculators to find out what is the optimum level of interest and loan term for you.
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