Finance experts often give conflicting advice, but there’s one bit of advice that most agree upon. If you use credit cards, you should watch which credit card you use for which type of purpose. The credit card that you use to pay for your day to day expenses is not necessarily the best card to use for your long term purchases.
Every credit card has certain terms and conditions. These include the annual percentage rate (APR), which tells you how much interest you pay on your outstanding balance. When you’re choosing which credit card to use for expensive purchases, this is the single most important factor. Let’s take a look at different types of credit cards to see why.
While there’s a lot of cross-breeding among the various card types, most emphasize one benefit at the expense of another. After all, the credit card companies have to make a living, too. That means that a credit card that offers rewards for using the card usually makes it up by making you pay a higher rate of interest on carried balances, or an annual membership fee, or both. Meanwhile, the low interest credit card most often offers no other benefits for its use because you’re saving money on your carried balances. For example:
The Cahoot credit card offers a typical interest rate of 11.8% – nearly two/thirds lower than the most expensive cards. There’s no annual fee, and no reward points or cash back on your purchases.
The Marbles credit card, on the other hand, will cost you 15.9% typical APR for carried balances, but will give you .5% cash back on every single purchase.
Let’s take a look at what a £500 audio system will cost you on each card if you pay it off at £50 per month over the course of ten months. Keep in mind that these calculations are rough estimates, as the interest you end up paying will vary depending on your actual APR and other purchases that you may make.
Card Cahoot Marbles
Purchase £500 £500
Interest £49.17 £66,25
Cashback 0 £2,50
Total £549,17 £563,75
You save £14,58 by whacking that purchase on your Cahoot card rather than your Marbles card. That may seem insignificant, but it adds up over time. If you’d decided to pay it off at £25 per month instead, you’d pay £98,33 in interest to Cahoot, and £130 in interest to Marbles. That’s £42 difference – enough to pay for half a dozen of your favorite music CDs to go along with your purchase.
If you want to see even more savings, check the terms of a balance transfer credit card and as soon as you can without incurring a major penalty, shift the balance to a balance transfer credit card with a 2-5% APR for the life of the balance.
Before you make a major purchase using a credit card, do a little homework at comparison sites to figure out which one will offer you the best deal on repayment terms. More often than not, unless you intend to pay off the entire balance within the grace period, a card with low interest rates will be a far better deal than one that offers you rewards or cash back.