Credit cards offer a lot of perks and benefits that are hard to beat with other types of financing. The ability to borrow money on a short term basis each month and repay it without interest is perhaps the most appealing feature that most credit cards offer.
Of course, you have to manage your credit cards a certain way if you want to avoid paying interest. Otherwise, those same accounts come with high-rate interest charges with the potential to waste a big chunk of your hard-earned money.
A credit card isn’t like an installment loan where your monthly payment is divvied up between your principal balance and interest fees each month. Rather, you can use your credit card to make purchases each month and repay all or some of the amount you borrow.
There are a few ways to avoid paying interest on credit card purchases. And understanding how credit card interest works is the first step to using your account wisely.
When you use your credit card to make a purchase, the card issuer pays the merchant upfront. You have to repay the card issuer, of course, but how you decide to handle that payment determines whether you will pay interest fees on most credit card accounts.
Should you opt to pay back a portion of the money you spent, the unpaid balance rolls over (or revolves) to the next billing cycle. When you revolve an outstanding balance on a credit card account, you will generally have to pay an interest charge according to the terms set forth in your credit card agreement. If you think there are times when you may carry a balance on your credit card, making sure to get a good APR is important.
No matter what, it’s critical to make at least the minimum payment due on your account by the due date each month. If you fail to do so, you could face consequences like late fees and negative credit reporting.
Although it’s not a legal requirement, most credit card companies in the United States offer their customers a grace period for the purchases they make on their credit card accounts. The grace period on a credit card account is the time between the end of your billing cycle and your payment due date.
If a card issuer does offer a grace period, it must follow the rules set forth in the Credit Card Responsibility and Disclosure (CARD) Act of 2009. Per the CARD ACT, there must be at least a 21-day gap between the date it mails the statement and the due date on the account.
Interest charges are the price you pay for borrowing money beyond the grace period on your credit card account. Therefore, your goal as a cardholder should always be to pay off your full statement balance before your grace period ends. If you follow this rule, you should be able to avoid the extra cost of interest fees on regular purchases.
However, if you do not pay off your balance by the due date on your account, interest fees will typically kick in and can cost you money—often a lot. The average credit card interest rate is 16.44% according to the most recent data from the Federal Reserve (Q4 2021, interest-assessing accounts).
Paying your full balance by the due date on your account is one way (and generally the best way) to avoid credit card interest. However, there may be other times when you can revolve an unpaid balance from month to month without having to worry about interest fees as well.
At the same time, there are circumstances that might cause you to pay more interest on your credit card balance (or a portion of your balance). And using your credit card in certain ways might cause interest fees to kick in immediately with no grace period. In the end, the amount of interest you pay—and whether or not there’s an option to avoid interest—all comes down to the fact that credit cards can have multiple annual percentage rates (APRs).
The purchase APR (aka standard APR) on your credit card applies to regular purchases that you make on your account. This is the annual percentage rate you can expect to pay if you use your credit card to make purchases and then revolve an outstanding balance from one billing cycle to the next. Most credit card accounts give you the chance to avoid paying these interest charges by paying off the balance in full during your account’s grace period.
Many credit cards will let you use your credit limit to consolidate other debts. This process is known as a balance transfer. It’s also common for credit card companies to offer a different, often lower interest rate (aka balance transfer APR) on the balances you transfer to your account.
You may find card issuers that offer a low-rate or even 0% APR on balance transfers for a limited time. Once the promotional period ends, any remaining balance from the transfer will start to incur interest at the regular APR rate on your account.
Using a balance transfer can potentially be a good way to consolidate and pay down other high-interest debts. But it’s important to be aware of a few factors before you use this debt-reduction strategy.
When you open a new credit card, the account might come with an introductory APR. This limited-time annual percentage rate could be as low as 0% depending on the terms of the offer.
It’s important to read the fine print if you plan to take advantage of a temporarily low or 0% APR. The intro APR may only apply to certain types of charges, like purchases. You’ll also want to make a plan to pay off the balance on the account (if you revolve one) before the introductory APR comes to an end.
You should also know that even with a low introductory APR on a credit card, carrying a balance could increase your credit utilization rate. A higher credit utilization rate can be bad for your credit score, even if you pay your bill on time each month and avoid late payment notations on your credit report. (See below for more on the impact that carrying a credit card balance can have on your credit score.)
A cash advance happens when you use a portion of your credit card limit to borrow cash from your card issuer. This isn’t the standard way that most people use credit cards and tapping into your credit card limit to access cash typically comes at a higher cost.
If your credit card company offers you the ability to request a cash advance, it will likely charge you a separate APR for those types of transactions. The cash advance APR tends to be higher than the purchase APR—sometimes to a significant degree.
A higher APR isn’t the only drawback of taking out cash advances with your credit card. You may also have to pay a cash advance fee and start paying interest right away with no grace period when you use your card in this way.
Paying your credit card bill late can trigger some unpleasant consequences. On top of late fees and the potential for negative credit reporting, your card issuer might decide to charge you a penalty APR. A penalty APR could be as high as 29.99%.
Another big perk that some types of credit cards may offer you is the chance to earn rewards on everyday spending. Some credit card rewards enthusiasts take advantage of these benefits to rack up enough points and miles to pay for free vacations and other valuable redemptions. Others prefer cash back that they can use to apply toward debts or other expenses.
There’s nothing wrong with trying to earn credit card rewards. In fact, doing so can help you stretch your budget and save money. But you should be careful to navigate the rewards-earning process responsibly. If you go into debt, the interest fees you pay on those purchases can quickly offset the value of any rewards you earn.
With rewards credit cards (or any other type of credit card) it’s critical to only spend as much as you can afford to pay off each month. This approach is the best way to protect not only your financial wellbeing, but the health of your credit score as well.
Credit scoring models like FICO® and VantageScore® consider many factors when calculating your credit score. Your payment history, of course, is highly relevant. But your credit utilization rate—that is the relationship between your credit card balances and limits—is another major credit score factor.
Credit utilization has a significant influence over 30% of your FICO® Score. A high credit card balance can lead to a high credit utilization rate. There’s a good chance that your credit score mightdecline if this occurs,
If you’re looking for actionable ways to improve your credit, take a look at your credit card balances first. Paying down your credit cards might have a positive impact on your credit scores the next time your card issuer updates your account information with the credit bureaus. And at the very least, reducing your credit card debt should help you save money on interest fees.
Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See her on LinkedIn and Twitter.
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.
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