Are high interest rates or low interest rates better?

Low interest rates are better than high interest rates when you’re borrowing money, whether it’s with a credit card or a loan. High interest rates are only good when you’re able to earn interest, such as when you put money in a savings account, checking account, CD or money market account.

The rate at which you’ll earn interest from a bank will be indicated as a percentage, followed by “APY” (annual percentage yield). With credit cards and loans, the rate at which interest accrues is expressed with “APR” (annual percentage rate) after the percentage.

Low vs. High Interest Rates on Credit Cards

When it comes to credit card interest rates, lower definitely is better. In general, credit card interest rates tend to be higher than those on loans. A low-interest credit card is one with a regular APR well under 17.68%, the average rate for people with excellent credit. Your credit card APR depends heavily on your personal credit standing, and you will need at least good credit to expect even an average interest rate.  

Low-interest credit cards are beneficial for people who may need to carry a balance from time to time, because less interest means you’re less likely to slide into unmanageable debt. For financing a big purchase or paying off an existing debt with a balance transfer, credit cards with 0% interest periods are usually better. They let you pay off a large balance over several months without interest, but the 0% APR period will end at some point, and these promotions often give way to higher-than-average regular APRs.

Low vs. High Interest Rates on Bank Accounts

Unlike with credit cards, finding a high interest rate should be among your top priorities when choosing a deposit account. You’ll typically find the highest APYs on high-yield savings accounts, CDs, or money market accounts, though each of these options comes with its own drawbacks.

• Traditional Savings Account: Regular savings accounts usually have lower interest rates than high-yield savings accounts, CDs and money market accounts. They typically come with low or zero fees and allow you to withdraw funds frequently, making them good for short-term savings goals.
• High-Yield Savings Account: High-yield savings accounts offer higher interest rates than traditional savings accounts. In some cases, the APY you receive will vary based on your balance or whether you have qualifying direct deposits. Rates also vary over time.
• Certificate of Deposit (CD): CDs typically offer a fixed interest rate but often have a high minimum deposit compared to other options and typically have penalties for early withdrawals.
• Money Market Account: Money market accounts allow for some monthly withdrawals and can offer higher interest rates than a typical savings account. However, many require you to maintain a high minimum balance to avoid fees or a reduced interest rate.

Checking Accounts Some checking accounts will pay you interest on your balance, though usually at a low rate. You may need to maintain a certain balance to avoid monthly fees.

You can compare the best interest rates on credit cards, checking, and savings accounts on WalletHub.