From cash back programs, free airfare, or simply the convenience of charging to credit, there are plenty of reasons to prefer spending with a credit card.
But too often, this preference can make it easy to overspend, get into debt, and pay gobs of credit card interest. Simply put, paying credit card interest on all of your purchases makes your life needlessly pricier.
But just because you use credit cards doesn’t mean you have to pay interest. By knowing more about credit cards, you can find out how to avoid interest on credit card spending.
How credit card interest works
Credit card interest is charged each month on the outstanding balance that you carry. Any purchases made within a month are added to the balance for that billing cycle, along with any outstanding charges from past billing cycles.
For example, maybe you have a $500 balance and charge an additional $500 to your card. Your balance at the end of the billing cycle will be $1,000.
Your credit card grace period
Credit card issuers offer you a grace period, usually around 20 to 25 days. This grace period is the time between when the billing cycle closes and a payment for the cycle is due. During your credit card grace period, you have the chance to pay down or pay off your balance before new interest accrues.
At the end of your grace period, which will usually coincide with your credit card due date, you will have a minimum payment due (usually equal to 1 to 3 percent of your balance).
After your due date, your credit card company will capitalize your interest. This means they will calculate any interest you owe on your balance, and add it to what you owe.
Calculating your credit card interest
You can estimate your monthly interest costs out by dividing your APR by 12 to find your nominal, or monthly, interest rate.
A 20% APR, for instance, would result in a 1.6% interest rate. That means you’ll get charged 1.6% in interest for the average daily balance you carry each month. For the $1,000 balance mentioned above, that would be about $16 each month in interest fees.
How to avoid interest on credit card charges
Knowing how a credit card works means you know how to avoid interest on credit card balances. Here are two tricks to never pay interest (or at least pay less interest over time).
1. Pay your credit card balance in full each month
Paying off credit card balances each month is central to responsible credit card management.
What does that mean? When you pay your credit card balances in full each month, you always pay the entire balance accrued during the previous billing cycle before the grace period ends. So for the $1,000 balance, you’d pay the full $1,000 before the due date.
Paying off your credit card each month is the most effective way to avoid credit card interest. Instead of carrying a balance over into the next month and getting charged interest fees, you settle your debts completely each month. You credit card issuer never has a balance on which to charge interest.
Additionally, setting this spending pattern helps you keep credit charges affordable. If you’re aiming to repay the balance each month, it has to be low enough that you’ll have funds to do so. Paying your credit card balance in full each month will also build positive credit history and could help raise your credit score.
2. Get a new credit card with 0% interest
Of course, repaying your credit card balance in full each month requires spending control and follow-through. Maybe you’re not quite there with your financial habits, or you have an outstanding credit card balance you can’t repay in full just yet.
Another idea for how to avoid paying interest on credit cards is to take advantage of a 0% introductory interest rate. If you get a new card with a 0% interest rate, you won’t get charged any interest rate for the full introductory period (typically 12 months).
Maybe you’re working toward a habit of paying balances off in full each month. Charging with a 0-interest card will help you build that system, while avoiding credit card interest during months you fall short.
If you have an existing credit card balance, a balance transfer can move that debt to the 0-interest card. You can get ahead with a year’s worth of payments being applied directly to your principal, rather than interest.
Stop wasting money on interest
When you use credit cards, paying interest fees may seems like an unfortunate fact of life — but it doesn’t have to be. With smart money management and a little planning, you can avoid interest fees for good.
Looking for more advice to manage credit card debt? Find ideas in our ultimate guide to paying if off faster.
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