Usually, you must pay interest whenever you take out a loan. While credit cards are technically a loan, there are steps you can take to avoid paying interest on credit cards.
Interest is typically a fee that comes in the form of a percentage of the amount you borrow from a lender. According to CreditCards.com, the average interest rate – also known as the annual percentage rate (APR) – on new credit cards was nearly 16% in November 2020.
While many people who carry balances on their credit cards end up paying interest charges month to month, there are ways to avoid paying interest on credit cards.
How is Interest Charged on a Credit Card?
Interest charges will accrue when you don’t pay your full balance by the due date. Failure to pay your full balance is also known as “carrying” a balance on a credit card.
If you pay any amount less than the full balance – for example, you only make the minimum monthly payment – your unpaid credit card balance will carry over to the next month. As a result, your credit card issuer will charge interest on these unpaid balances.
Paying your balance in full every month gives you a “grace period” for a credit card. A grace period is the period during which a borrower is allowed to pay their full balance without having to pay interest. According to the Credit CARD Act of 2009, credit card issuers are required to give a grace period of at least 21 days.
It means that after the end of the billing cycle, you have at least an additional 21 days to pay off your credit card balance. If you fail to pay off your balance before the grace period expires, the credit card issuer will start charging interest on the outstanding balance.
Do You Always Get Charged Interest on Credit Cards?
As mentioned earlier, you get charged interest on a credit card when you fail to pay off your balance within your grace period. When you carry a balance from month to month, you will be charged interest on the unpaid balance.
Also, you will get charged interest on transactions that don’t have a grace period (e.g., taking out a cash advance or making a balance transfer). You can reduce the amount of interest on credit cards or avoid paying it altogether if you pay your full balance by the due date.
How Do You Avoid Purchase Interest Charges?
Most credit cards give you a grace period for new purchases between the end of the billing cycle and the date when your bill is due. You can avoid purchase interest charges if you pay off your statement balance in full by the due date.
The credit card issuer will not charge interest on purchases if you pay the entire purchase off before the grace period ends.
How Do You Avoid Compound Interest on Credit Cards?
Most credit card companies compound interest on a daily basis and charge it monthly. This means that interest will be added to your original balance at the end of every day. Compound interest on your credit card can make it more challenging to pay your balance in full.
You can avoid compound interest by reinstating your grace period. Typically, borrowers are required to pay their credit card balance in full for two consecutive billing cycles to reinstate a grace period. However, your eligibility to restore a grace period depends on your specific agreement with the credit card issuer.
How to Avoid Paying Interest on Credit Cards?
To sum up, you can avoid paying interest on credit cards or pay less in interest if you:
- Pay your full purchase balance by the due date. You will avoid purchase interest charges if you pay your purchase balance in full by the end of the grace period. However, keep in mind that the credit card issuer may still charge interest on transactions such as cash advances and balance transfers.
- Don’t wait until the end of the grace period to make a payment. Many borrowers choose to wait until their grace period expires to pay off their credit card balance. However, doing so may cause your balance to accrue interest if you make a late payment. Instead, pay earlier and make payments more than once a month to reduce interest charges or avoid paying interest altogether.
- Use a credit card with a 0% introductory APR. Another way to avoid paying interest on credit cards is to use a card with a 0% introductory annual percentage rate on purchases. Typically, the APR will increase to the credit card’s standard rate once the promotional period ends.
Frequently Asked Questions (FAQs)
How is Credit Card Interest Calculated?Every card has its annual percentage rate (APR), which isn’t the same as its interest rate even though the two things are interrelated. A credit card’s interest rate can be calculated by dividing its APR by the number of days in a year (365). The figure will indicate how much interest you will be charged every day if you don’t pay your balance in full and carry a balance from month to month.
Can a Credit Card Issuer Increase My Interest Rate?Your credit card company can increase your interest rate if any of the following is true:
- You defaulted on your credit card’s terms;
- You have a variable interest rate that’s subject to periodic changes without notice;
- Your credit score has dropped significantly; or
- Changes were made to your debt management plan.
Can Only Making a Minimum Monthly Payment Hurt Your Credit Score?Credit bureaus consider a variety of factors when calculating your credit score. One of them is your credit utilization ratio, which is the amount of money you owe divided by your credit limit. Ideally, you should keep your credit utilization ratio below 30% to maintain a good credit score. For this reason, only making a minimum monthly payment could potentially hurt your credit score if your credit utilization ratio is higher than 30%.
Also, keep in mind that you will have to pay late fees if you do not make the minimum monthly payment.