Credit cards are incredibly useful, but the interest can easily pile up. Discover how to avoid paying interest on a credit card.
The best way to avoid paying any credit card interest is to always pay your balance in full. This prevents interest from ever building up. You can also look for cards with 0% introductory APRs, although that rate is usually just temporary.
Continue reading to learn more about credit card interest, including how it works and how to avoid it.
How to Not Pay Interest on Credit Card
One of the biggest risks of using a credit card is not paying off your balance and accumulating interest. Because credit card interest typically compounds, it can grow very quickly.
Before you can learn how to avoid paying that interest, you need to understand how it works in the first place.
Understanding Credit Card Interest
The reason that credit cards charge interest is simple. They are a type of loan, and it is standard practice for loans to come with interest charges so that the issuing company can make a profit.
The difference is that credit cards only charge interest when you don't pay your balance at the end of the billing cycle. By contrast, a loan will charge interest on the principal at set intervals.
Because of the way we use credit cards, many people forget that they are technically loans. However, this is the best description for them. After all, when you use a credit card, your card issuer pays for the transaction. You then pay them back on your next credit card bill.
As mentioned, you won't typically have to pay interest just for using your credit card. (However, you may have an annual fee.) You will, however, have to pay interest if the balance carries over to the next billing cycle. When this happens, it becomes revolving credit.
Credit card issuers may calculate interest monthly or daily. You can check which one is the case for your card issuer.
When Credit Cards Charge Interest
Keep in mind that bills for purchases are not the only instances when your credit card will charge interest. Most also charge interest for balance transfers or cash advances.
This is important, especially because your card may have a separate rate for all three situations. Don't just assume that purchases, cash advances, and balance transfers all have the same interest rates. You can find the interest rate on your account statement. It should also be on the paperwork from when you opened your account. Most credit cards will also have them listed somewhere on your online account.
Of course, you also need to remember that in addition to interest, your cash advance or balance transfer is likely to also include a fee.
Cash Advances Can Start Accumulating Interest Right Away
If you use your credit card for a cash advance, beware. Not only will you be charged high fees and interest rates, but the interest may start accruing immediately.
This may be unexpected, especially since your interest on purchases doesn't start accumulating until your billing cycle.
Variable Vs. Non-variable Interest Rates
As you compare interest rates on credit cards, you will notice that some are variable and some are non-variable.
As the name implies, variable rates are more likely to change. These are typically fluctuate based on the prime rate. So, when the prime rate changes, your rate would likely change.
By contrast, non-variable rates tend to stay more or less the same. However, they can change if you miss payments or make late payments.
You will also notice that some credit cards offer introductory interest rates. These are extremely low interest rates that only last for a limited time. They are designed to attract more cardholders.
Before signing up for a card with a great introductory rate, be sure to read how long it lasts and what your rate will be after.
Credit Card Tips to Minimize or Eliminate Interest
With all of that background on interest rates in mind, how do you avoid paying interest on your credit card?
Pay Off Your Balance
We touched on this method in the explanation of interest rates. Your credit card issuer will only charge you interest if you are late on your payment.
This means that the simplest way to avoid paying interest on your credit card bill is to never let it get late. Pay your balance on time, every single time.
Set Up Automatic Payments So You Don't Forget
Saying you should pay off your balance is one thing, but remembering to do so can be another issue. You can avoid this problem by setting up automatic payments. Most credit cards will offer this option, and it should not take long to set up.
Of course, the caveat is that the bank account you use to automatically pay the balance must always have enough funds to do so.
You Don't Have to Wait Until the End of the Billing Cycle
When it comes to paying your balance, remember that you don't have to wait until the end of your billing cycle. Paying at least twice per billing cycle can help reduce the risk of forgetting to pay if you don't have automatic payments set up.
If you currently have a balance, then paying twice per cycle may also help you bring it down. That, in turn, should reduce your interest payments.
If You Can't Pay the Full Balance, Pay What You Can
While your ultimate goal should be to pay your full balance due at the end of every cycle, this isn't always possible. Even if you can't afford to pay the entire thing, pay as much as you can.
Remember that the lower your balance is, the less interest you will have to pay.
Take Advantage of Your Grace Period
The good news is that credit card issuers give you some wiggle room when it comes to paying off your balance before charging interest. This comes in the form of your grace period. A grace period will be 21 days or more.
Additionally, the law requires your credit card issuer to send you your billing statement before your grace period begins. This means that you will have the full grace period to pay off your balance.
Just remember that there are exceptions to the grace period. For example, if you have a balance from the previous billing cycle, you may not get a grace period on the current cycle.
Additionally, you will not get a grace period on cash advances, and you may not get one on balance transfers.
Confirm You Actually Have a Grace Period
While most credit cards have grace periods, some will not. As such, take the time to confirm that yours has one and how long it is.
Find 0% Introductory Periods
We also mentioned that some credit cards have 0% APR introductory rates. Taking advantage of this is another simple method of not paying interest.
However, make sure that you read the fine print. Most importantly, pay attention to when that introductory rate ends and what the balance will be after. Try to pay down your balance before the promotional period ends. Otherwise, you may find yourself paying interest on a sizable balance.
How to Minimize Credit Card Interest If You Can't Avoid It
In an ideal world, you would never accrue interest on your credit card. However, life happens, and sometimes it isn't always possible.
If you can't avoid interest entirely, then you can at least minimize it.
Pay as Much of Your Balance as Possible
As mentioned earlier, get in the habit of paying off as much of your balance as you can every month. This will reduce the principal and, therefore, the total interest.
Remember that you can make multiple payments per billing cycle if this helps you pay off your balance more quickly.
Try Not to Spend More than You Can Afford
One of the most important tips for using a credit card is to limit your spending to what you can afford to pay off. You can make exceptions to this rule in emergencies, but try not to break it otherwise.
As long as you make it a point to only spend what you can pay off, you have a better chance of paying your balance in full and never accruing interest.
Shop Around for Interest Rates
One of the most effective ways to reduce the net interest you pay is to get a lower interest rate. Before you sign up for a new credit card, compare various rates to make sure you get a good deal.
Improve Your Credit Score
It is also smart to try to improve your credit score. This is one of the major factors credit card issuers use when determining your interest rate. It will also determine what cards you are approved for. The better your score, the more likely you are to be approved for cards with a lower rate.
Remember that your payment history is among the largest influences on your credit score. This is yet another reason to prioritize paying your balance in full every billing cycle.
The most effective method of avoiding credit card interest is to always pay your balance before the end of your billing cycle. You can also look for a card with a 0% introductory rate, although this will only last for a limited time. If you can't completely avoid credit card interest, do your best to minimize it.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.