Cash Back vs. 0% APR: Here’s How to Choose Your Credit Card

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You have dozens of credit cards to choose from. Read on to learn the pros and cons of two popular types of card. 

Choosing a new credit card can be fun. One of the sweet credit card perks you can snag is the ability to earn cash back as a percentage of purchases you make. And another is receiving a period of 0% APR, meaning you won’t have to pay interest on your purchases for as long as 21 billing cycles after opening a new card. Given that the average credit card interest rate is 24.52% as of this writing, that’ll save you a chunk of money.

So which one should you go for? It helps to pinpoint how you want to use the card before you apply. Let’s take a look at a few situations and see whether a cash back rewards credit card or a 0% APR credit card might be a better fit.

You need a credit card for ongoing expenses

If your hope in opening a new credit card account is that you’ll use it for your everyday expenses, a cash back credit card can do great things for you. What’s really cool about these cards is that they exist for many different kinds of spending, so you can choose one that helps you maximize the cash back you earn. For example, last fall I got my first grocery credit card. I love to cook, and my grocery store spending is a large part of my monthly budget, so getting this card has been a game changer.

Consider your own everyday expenses when picking the right card for you. And remember that it’s best to pay off your card every month, or else the interest charges you’ll incur on your balance will more than eat up the cash back you receive.

Verdict: Opt for a cash back card

You need a credit card to finance a big purchase

Want to make a big purchase but don’t have the cash in your checking account to cover the cost in full? A 0% APR card is tailor-made for this situation because you’ll get a period of time (sometimes as little as six months, but perhaps as much as 21 months) to pay off the charge without paying interest.

There is one downside, however: Don’t assume that the card issuer’s minimum payment due will be enough to pay off your purchase before you earn interest on it. Let’s say you spend $800 on a new washing machine and get a full year (12 months) of 0% APR, but your minimum payment due every month is only $50. Paying only $50 per month for 12 months would leave you with a $200 balance remaining when interest comes due (12 x $50 = $600). Instead, divide $800 by 12, and you’ll come to an actual minimum payment of about $67 per month. Pay that for 12 months, and you won’t owe interest.

There is one instance where a cash back card might be good for a big purchase, and that’s when you have the cash saved to pay the purchase off right away and earn a big chunk of cash back in the process.

Verdict: Could go either way, but edge to 0% APR card

You need a credit card for emergencies

Let’s say you want to add a new credit card to your stash to have in case of emergencies. Ideally, you’d have an emergency fund for unplanned expenses, but sometimes life (and a lower salary) stands in the way of that, so I get it — and sympathize. In this instance, you could opt for either type of card, but I’m betting that you’d rather not risk having to pay interest on surprise bills. A 0% APR card with a long introductory rate period is probably the best fit here.

Verdict: Could go either way, but big advantage to 0% APR card

You need a credit card to help you pay off other debt

Finally, you might want a new credit card to help you tackle other debt in the form of debt consolidation. In this situation, a special type of 0% APR card is the way to go. The best balance transfer cards come with a long period of 0% interest and a smaller balance transfer fee (a percentage of the debt you’re transferring to the card). If you have a plan to pay off your debt, using this method can save you money.

Verdict: 0% APR card, hands down

As you can see, it’s important to do some thinking (and research on the best credit cards) when it’s time to add a new card to your wallet. Credit cards are a useful financial tool if you watch out for interest and use the right card for a given situation.

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