The credit card that beats 0% cards

Low-rate cards are not just more simple, but they can even be cheaper than 0% cards!

Anyone who gets a 0% card and then sticks with it after the introductory deal expires will typically pay around 18% interest thereafter. If you can't picture how expensive that is, let me tell you that it is a very expensive debt indeed!

Yet there are those who can't be bothered to hop around from card to card, chasing the best interest rates all the time. They just want a single, fair rate for both purchases and transfers, with no fees, combined with the usual benefits of a credit card: the ability to borrow and repay flexibly.

Low-rate credit cards

And those are just some of the benefits that low-rate credit cards can offer. Another is that low-rate cards can be even cheaper than 0% cards, but I'll come to that later. Firstly, here are all the current low-rate cards on the market (that aren't exclusive to particular types of customer):

You saw that right: there are just two low-rate credit cards (which I define as under 10%) that are available to new applicants.

The top card is Barclaycard Simplicity, charging 7.9% APR flat, with no introductory deals. (Note that credit card interest rates are “representative”, meaning that perhaps half of successful applicants will be offered higher rates.)

When you pay off purchases in full each month you don't pay any interest at all, although interest is charged from day one with balance transfers.

This card also comes with Barclaycard's rewards programme, called Freedom, which covers more than 20,000 retailers. What's more, the card includes contactless technology. Familiar to Oyster users, this technology allows you to pay for small items instantly simply by holding your card out to a reader.

Like many credit card benefits, rewards programmes and contactless technology can also be a disadvantage if it encourages you to spend more overall, so control your impulse buying.

The runners up

The Barclaycard is a whole two percentage points cheaper than the number two low-rate card, the Capital One Click Card, which charges 9.9% interest. This rate is not just on balance transfers and purchases, but also on cash withdrawals. However, that is actually a booby trap: you also have to pay fees on top. Hence, you should not use your credit cards to make cash withdrawals.

The next cheapest are from Lloyds and Saga, but since they're just shy of 12%, they're not what I'd call “low rate”. Cheap for credit cards or overdrafts, yes, but on the expensive side for borrowing in general.

There is another card worth mentioning. The MBNA Rate for Life card charges 5.9% on balance transfers only. This is fixed until the transfer is paid off. If you expect to take at least two to two-and-a-half years to pay off the transfer, this card could work out better for you than the best 0% card currently available (another Barclaycard – read about it here), assuming you don't switch cards when 0% deals expire.

Safeguarding your low interest rate

Low-rate cards are variable, meaning the lender can increase rates. (Theoretically lenders can lower rates too, but I can't remember any occasions where a lender has done that for existing customers.)

However, according to the industry's Lending Code - which is now enforceable in the courts along with all other codes from financial institutions - lenders will not increase rates within the first 12 months. Therefore, you can be certain you'll have a 7.9% rate for at least one year.

The catch is that you have to keep to your terms and conditions, so always read for changes on your statements and in your lender's letters, and make at least the minimum payment on time.

There is a second safeguard. New rules mean that you can opt out of interest-rate increases. You read that right: when you're notified of an increase, you can reject it inside 60 days. If you do so, you will not be allowed to borrow more and must repay the card debt in a reasonable time (bearing in mind your financial circumstances and the existing level of minimum payments), but the lender cannot increase your interest rate.

Hence, you could lock in your 7.9% APR until you have repaid your debt.

Alternatives to consider

Personal loans can be cheaper if you have an exceptional credit record, and the interest rates are fixed. The downside historically has been that they aren't as flexible as credit cards. They still aren't, as you can't increase your debt at a whim. However, under new laws you can now repay them faster at no cost.

That said, you do have to contact the lender specially each time you want to overpay, and you must follow the correct procedure. You can read about it here. What's more, this hasn't been tested; I don't know how much resistance you might expect from lenders, or if they have found some sneaky way around the laws.

A number of lenders have cut their loan rates in recent weeks. To find out more, have a read of New market-leading 6.7% loan.

Another advantage over 0% cards and peer-to-peer loans

Peer-to-peer loans are different to most regular loans in that they explicitly say, and always have done, that you can repay earlier at no cost if you repay in full.

One downside is you pay a fee upfront, so if you can suddenly pay off your debt quickly, you've paid a whacking great fee for little in return. This is comparable to taking a 0% deal with a fee, and paying it off just a few months later. In the end, the fee wasn't worth it.

Low-rate cards are cheaper in this situation. Here's an example. You borrow £1,000 and repay in equal instalments over just six months:

• If you use a 0% card charging a 3% fee, it will cost you £30.
• If you use a low-rate card charging 7.9% APR, it will cost you just £23.

So a 0% card can be more costly than a low-rate card. If you're astounded by that and want to know more, read this, but suffice it to say that low-rate cards aren't just more simple, but they can also be cheaper in the right circumstances.

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