How to work out if a no annual fee credit card is worth the extra interest

No annual fee credit cards tend to have a higher rate of interest than credit cards that sell themselves as having a low rate of interest.  They can suit some people and low interest credit cards can suit other people.

There is a way of calculating whether a credit card holder should go for a no annual fee credit card or a low interest credit card.  Essentially a person who is looking to judge between the two types of credit cards will need to look to see how much money they will be saving on their credit card fee and comparing that to the interest rate that they would otherwise be getting.

The way to compare these two figures is to look at the annual fee that the low interest credit card charges and to then divide it by the balance that the credit card holder is likely to have over the year.  This will get the equivalent interest rate.  For example if there is a $100 fee and a $5,000 balance that is likely throughout the year then the interest rate is going to be 0.02, or 2%.  If there were two interest rates of 12% and 15% then the annual fee would be worth the saving on the interest.

However for a far lower balance then the equivalent interest rate would be far lower.  For example if there was a $750 average balance throughout the year then the equivalent interest rate would be 13.3%.  This would mean that an interest rate would have to be considerably lower before the annual fee was justified.

The difference between annual fees and low interest rate credit cards is actually one of the balance that is carried and not the amount of money that is spent on the card.  If there is a large amount of money spent on a card but the balance is paid off in full every month then a low interest credit card will not be much use.  This sort of thing is very common with credit cards that employees use to put on employment expenses.

If a person is likely to be spending a lot of money on a credit card and to be paying off the balance in full every month then they should look at rewards cards.  These give rewards for every dollar spent on the card.