How To Avoid Interest on Credit Card Debt
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Summary:
A credit card is a handy financial tool, but the interest charges can add up quickly if you’re not careful. However, there are several ways to avoid credit card interest altogether or at least to minimize the interest you do pay. For example, you can pay your balance in full every month or take advantage of balance transfers.
It’s practically impossible to get by in the world today without at least one credit card in your wallet, and there are plenty of useful and practical reasons for having one. However, they can also lead to overspending and mountains of interest charges if you’re not vigilant about your credit card management.
In this article, we’ll go over the ways you can avoid credit card interest (such as paying your balance during a card’s grace period), as well as situations where you can’t avoid interest altogether but may be able to minimize your interest payments.
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How to avoid interest on credit cards
There are a number of ways to avoid interest charges on your credit card purchases. If you’re concerned about credit card interest, consider using one or more of the following strategies:
Pay your balance in full each month
The easiest way to avoid paying credit card interest altogether is to pay your balance in full every month before your billing cycle ends. This is known as the “grace period” for purchases. Almost all credit card issuers grant customers a grace period on credit card transactions of at least 21 days. This means if you pay your total bill within the credit card’s grace period, you will pay zero interest on those purchases.
Be aware, however, that even if you only carry a small balance into the next billing cycle, you will lose your credit card grace period and new purchases will begin to accrue interest immediately. To be on the safe side, if you can manage it, always pay your credit card bill before the due date. Remember, if you always pay your full balance every month, you’ll never have to worry about how much interest your credit card issuer charges!
Apply for a 0% introductory rate credit card
If you’re approved for a credit card with a 0% introductory period, you typically won’t need to pay any interest charges for six to 21 months. Credit cards with 0% interest rates are a great option if you anticipate any major expenses, such as financing a vacation. This way, you can pay off your credit card debt over time, all interest-free. Just make sure to pay the full balance before the credit card’s interest rate kicks in!
How deferred credit card interest works
One point to look out for with 0% promotional financing credit cards is that some stores or credit card issuers use a deferred interest arrangement. In this scenario, you’ll begin accruing interest immediately, but you won’t owe interest payments as long as you pay your statement balance before the promotional period is up.
The problem is that if you don’t pay the full balance before the grace period, you’ll be on the hook for the interest charged on the original balance, not just the remaining balance, as is common with most credit cards. Make sure to read the fine print before you spend more than you can afford!
Apply for a balance transfer credit card
Balance transfer credit cards are similar to credit cards that offer 0% financing on purchases, except in this case, the 0% applies only to balance transfers. These cards can offer a great opportunity to catch up on debt if you’re carrying a high average daily balance on another credit card that will take some time to pay off.
As with 0% introductory APR cards, the card issuer won’t charge interest on the balance until the promotional period is up (or if you have missed payments), so be sure to make your monthly payments on time and pay off the balance before interest charges kick in.
Pro Tip
If you have a credit card that you don’t carry a balance on, ask your card issuer if they have a balance transfer option. Many credit card companies offer this deal to card owners who don’t have much activity on their cards. Basically, card issuers hope you’ll still have an outstanding statement balance after the promotional period so they can start making money from your credit card interest. However, you can avoid this scenario by paying the balance in full before the promotion ends.
Don’t take out cash advances on your cards
Even with a credit card that offers a 0% promotional period, that introductory period typically doesn’t extend to cash advances. If you take out a cash advance, you will need to pay interest on that balance even if you repay it before the card’s billing cycle is up. In other words, there is no grace period for cash advances.
In addition, the annual percentage rate on cash advances is normally much higher than credit card interest rates on everyday purchases. Also be aware that on top of interest charges, most credit card companies also charge a cash advance fee, which is usually a percentage of the amount you take out. In short, a cash advance should be considered a last resort, so only consider this option in the event of an emergency!
How to minimize credit card interest charges
You can’t always avoid paying interest altogether, but there are several ways you can minimize the interest charges you do need to pay:
Ask your credit card company to reduce your interest rate
Sometimes creditors will lower your credit card interest rate upon request. They may do this if you tell them you’re going to close your account or if you are not already carrying a balance, so as to encourage you to use the card. A credit card issuer may also lower your rate if your credit score has improved in the months or years since you opened your account.
Pro Tip
You probably won’t get anywhere with the first customer service representative you reach over the phone. They may be trained to deny your request, or they may not even have the authority to grant it. You’ll likely have much better luck if you ask to speak to a supervisor.
Consolidate your credit cards with a loan
If you have several cards that each carry a revolving balance, consider taking out a personal loan to consolidate your credit card debt. You can usually get a lower rate than the average credit card interest rate (assuming you have a good credit history), which will help you to save money on interest charges. Plus, once you’ve consolidated your debt, you’ll only have one monthly payment to budget for, says James Allen, CPA, CFP, CFEI, and founder of Billpin.com.
“One way to save money is to consider debt consolidation. It’s like putting all your eggs in one basket, but in a good way. If your credit is good but your debt payments feel overwhelming, consider consolidating them into one account. That way, you only have to make one payment each month to chip away at the balance.”
Pro Tip
Be sure to regularly get your free credit report from each of the three major credit bureaus — Experian, TransUnion, and Equifax — to keep track of your credit score and watch for inaccuracies or evidence of fraud.
Make multiple payments each month
When you carry a balance on your card, credit card interest charges can add up fast. Another way to minimize your interest charges is to make multiple monthly payments each billing cycle. This will reduce the amount of interest you’re paying and save you money in the time it takes to repay your credit card balance in full.
If you can’t manage multiple payments each month, at least try to make more than the minimum payment, Allen suggests.
“One of the most effective ways to avoid paying interest on your credit card purchases is to pay more than the minimum payment each month. Banks make money off the interest they charge each billing period, so the longer it takes you to pay, the more money they make.”
IMPORTANT: If you miss your due date on a credit card payment, your credit card issuer may raise your interest rate and also charge you a late fee. If you’re prone to forgetfulness, you may want to consider having your credit card payment automatically deducted from your bank account each month.
Commit to a debt management plan
If you have multiple credit cards, another strategy you can use is to come up with a debt repayment plan that you’ll be able to stick to. First of all, stop making purchases with your cards. You don’t need to cancel them, simply avoid using them. Next, you might want to try the debt avalanche plan of action, suggests Allen.
“If you can’t avoid interest altogether, consider the debt avalanche method. This strategy involves paying off the card with the highest interest rate first. It’s like tackling a mountain: you start with the highest peak (the card with the highest interest rate), and once you’ve conquered that, the rest of the journey becomes easier. This method can be faster and cheaper than other methods.”
Others might feel more comfortable with the debt snowball plan. This is similar to the avalanche model, but instead of starting with the debt with the highest interest rate, you pay off the smallest debt balance first. Knock that one off as quickly as you can while only making the minimum payments on your other cards, then move on to the next card. Some people prefer this method over the avalanche system because the results become evident much quicker, which can motivate you to keep paying down the rest of your debt.
Pro Tip
If you’re having trouble managing your credit card debts on your own, you might want to consult with a credit counseling agency. Experienced counselors can help you assess your finances and come up with a plan to budget your money and repay your debts.
Key Takeaways
- You can avoid credit card interest by paying your balance in full every billing cycle (during the grace period), taking advantage of balance transfer credit cards, or applying for credit cards with a 0% promotional period.
- You should avoid cash advances at all costs because you’ll be charged interest at an even higher rate than for normal credit card transactions.
- If you can’t avoid credit card interest altogether, you can minimize your interest charges by taking out a consolidation loan, asking your credit card company to lower your interest rate, or following a debt repayment plan.
- You can get a lower interest rate on credit cards (and other types of lending) if you have a good credit history, so it’s worth taking steps to boost your credit scores as much as possible.
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