The difference between short term and long term low interest rates

Many credit cards that offer the lowest interest rates will end up charging the highest interest rates.  This may sound paradoxical, but it is actually down to the practice of introductory interest rates.

Introductory interest rates are interest rates that will last for only a few months, usually between three and fifteen months.  This will mean that a credit card user will have a very low interest rate for a certain period of time and then will find themselves on a standard interest rate, or usually a slightly higher than standard interest rate.

The short term interest rates are designed to be unprofitable for the credit card companies over the introductory period.  This is not surprising when some of these interest rates are as low as zero per cent.

The reason why it is used in this way is because the short term interest rate acts as a marketing tool.  Credit card companies have spent a lot of money on marketing and advertising in order to attract the best credit card customers, those who borrow a fairly large amount on a credit card but who will pay back regularly.  Some of these customers can be attracted more cost effectively through short term low interest rates.  This will mean that the card will become profitable in the long run.

Long term low interest rates are designed to be profitable for the lifetime of the card.  This will mean that their interest rate is higher than the short term low interest rate credit cards.  However it will also mean that the interest rate will not go up.

The interest rates, although sustainable, tend to be considerably lower than the interest rates on most standard credit cards.  This is done in three ways.

The first way in which this is done is through stopping offering such extra features as rewards schemes and free insurance.  This can mean that a credit card can be far cheaper to run.

The next thing that is done with a long term low interest rate credit card is more rigorous credit checking.  This means that a major cost of a credit card, the defaults on the card, are minimised.

Finally there is the use of differential interest.  This is having different interest rates for different balances.  This can mean that a low interest rate on spending may also mean that there is a high interest rate on balance transfers.