Credit cards are popular because of their convenience, but that convenience often comes at a high price. It’s not uncommon to see credit card APRs higher than 20%, and some cards charge upwards of 30%. But depending on how you use your credit card, the APR may not matter.
This article discusses when your credit card’s APR doesn’t matter and when it does, along with some tips on how to avoid paying interest.
When you shouldn’t care about your credit card’s APR
“If you never carry a balance [from month to month], the APR won’t matter,” says Beverly Harzog, credit card expert and author of “The Debt Escape Plan.”
That’s because when you pay the bill in full, nothing carries over to the new month, so there’s no balance to which the credit card company can apply the APR. Most credit cards have a grace period between the day your statement closes and the due date – often more than 20 days. During that time, interest doesn’t accrue as long as you’re not carrying a balance from month to month.
Keep in mind that credit card companies aren’t required by law to have a grace period. The good ones do, but you’ll want to keep an eye out on the terms and conditions if you’re applying for a credit card for bad credit.
If choosing a new card and you are in the habit of paying off your credit card balances in full every month, you should focus on the rewards and other features the card offers, letting you maximize the value you get out of the card.
“You want to get a rewards card that is in sync with how you spend your money,” says Harzog. “That way, you can truly benefit from your card. But only if you aren’t carrying a balance!”
When you should care about your credit card’s APR
If you carry a balance from month to month, even infrequently, a credit card’s APR should be at the top of your priority list when choosing one. Most rewards credit cards have high APRs. And if you end up paying interest even just a month or two every year, it can significantly decrease the amount you’re earning in rewards.
Also, note that if you’re carrying a balance every month, you’re most likely paying more in interest than you’re earning in rewards. Plus, Harzog adds that “once you carry debt from month to month, you can easily end up with a huge balance due to compound interest.”
How to make sure you pay in full each month
Paying off your bill completely each month neutralizes the effects of your credit card’s APR. For many people, though, that’s easier said than done. Use these tips as you work toward paying off your card in full each month.
1. Live on a budget
When using credit cards, it’s important to know exactly how much money you have to spend each month and where you’re spending it. Focusing only on what you have in your checking account is an imperfect strategy. It doesn’t account for purchases that happen later in the month.
A budget can help you keep track on a macro level as well as more granularly. “Decide how much you can put on your credit card and still be able to pay it off when the bill comes,” Harzog says. “When you reach your budgeted limit, stop using your credit card.”
Having a budget is especially helpful during months when you have infrequent recurring expenses – say car insurance, annual dues or holiday shopping. Planning ahead in those months can keep you from overspending.
2. Make frequent payments
Instead of paying your credit card bill once a month, consider making multiple payments throughout the month. You can do it once a week, on payday or whenever else you want.
This strategy can give you a better idea of whether you’re charging too much to the card. It can also keep you aware of your spending overall and where your money is going.
3. Set up auto-pay
If you sometimes forget to make your payment by the due date, you’ll end up paying both late fees and interest. Consider setting up automatic payments from your checking account. You can set the date that the money comes out and how much (i.e., the most recent statement balance, the current balance or another set amount).
To make this work, you’ll need to make sure you have the cash in your checking account on the payment date. Otherwise, you may be hit with an overdraft charge by your bank. If you don’t have overdraft protection or the payment amount exceeds your overdraft limit, the payment will be returned. When this happens, the credit card company may charge you a fee.
If you have a balance
Paying off your balance in full each month can be difficult if you already have a big balance on the card. To help pay it down more quickly so you can begin paying in full each month, consider using a debit card or cash for new purchases until the balance is paid off.
Also, check out balance transfer offers to see whether you can transfer your balance to a new credit card with a 0% APR promotion. This strategy can help you pay off the balance sooner and with less interest.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.