Low Interest vs. Cash Back Credit Cards

September 21, 2015, Written By Jason Steele

Which credit card is best? That is the million dollar question, but there is no one correct answer. The right credit card will be the one that best meets your needs. Among the top credit cards offered are those with low interest rates and those that offer cash back. And unfortunately, you will have to choose, as credit cards that offer cash back will usually have a higher interest rate than similar cards that do not.

Who low interest rate cards are right for

According to the most recent Gallup survey on U.S. credit card use, only about half of all credit card users avoid interest charges by paying each month’s statement balance in full. The other half of American credit card users will always carry a balance, or do so regularly. For these credit card users, the cost of interest should be their primary concern, and will outweigh the value of any cash back they could receive. This is true because saving just a few percentage points on their interest rate will be more beneficial than the most generous cash back offers.

In addition, those who incur interest charges often struggle with credit card debt. In these cases, being rewarded for their spending may encourage them to make unnecessary purchases, just to earn rewards. Furthermore, rewards can serve as a distraction from their primary goal, which should be retiring their credit card debt. By focusing on finding a credit card with the lowest possible interest rate, these cardholders can achieve their financial goal as early as possible.

Who cash back cards are best for

Cash back cards appeal to the other half of the credit card market, those who never incur interest charges. For these credit card users, the interest rate is relatively irrelevant and should have no effect on their choice of cards. Instead, these cardholders are able to leverage their credit card use to receive the maximum return possible from their spending.

Among the cash back cards to choose from are cards that offer the same rate of return on all spending, and those that will offer higher bonus rewards for purchases from particular categories of merchants, and lower level rewards for all other purchases.

In addition, there are cash back credit cards that offer even larger rates of return, but require the payment of an annual fee. In these cases, cardholders must estimate the amount of spending they will make in the various bonus categories, and then calculate the rewards they are likely to earn. For these annual fees to be worth it, the rewards earned must not only exceed the cost of the annual fee, but must also exceed the amount of rewards that could have been earned with a similar card that has no annual fee. So if you could earn $100 cash back in a year with a card that has no annual fee, it’s not worth it to pay a $95 annual fee just to use a card that might yield $150 a year in cash back.

How to earn cash back while having a low interest rate

There is a major exception to the proposition of either earning cash back rewards or having a low interest rate. There are some cash back credit cards that offer 0% APR promotional financing on both new purchases and balance transfers, but there are some drawbacks to this strategy. First, these offers are limited in time, so they will eventually expire and any remaining balance will be subject to the standard interest rate, which will be higher than a low interest rate card that doesn’t offer cash back.

And in nearly all cases, transferring a balance to one of these cards will result in a 3% balance transfer fee. The exception is the Chase Slate card which offers 15 months of 0% APR financing on both new purchases and balance transfers, with no balance transfer fee if the transfer is made within the first 60 days of being a cardholder.

Finally, receiving a 0% APR introductory rate can be a temptation for some cardholders to stop paying off their balance, which is a big mistake. Having a large unpaid balance will hurt your credit score, and putting off repayment will be much more costly once the standard interest rate begins to apply. Instead, cardholders utilizing promotional financing offers on cash back cards should look to pay off their balance in full before the 0% rate expires. Then, cardholders should avoid interest by paying their balance in full each month, for as long as they use this card. Should they need to extend payment on a particular purchase, then it might be advantageous to use a different card with a lower interest rate.

By carefully considering the strengths and weaknesses of both cash back and low interest rate credit cards, you can select the one that will save you the most money in the long run.

The information contained within this article was accurate as of September 21, 2015. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.