How to avoid interest on a credit card

Credit cards allow you to spend borrowed money — and you’ll pay a hefty interest rate for the privilege. In fact, the average credit card APR is somewhere around 20%. Fortunately, there are ways to avoid interest on credit cards.

By paying off your balance in full each month, you can avoid any interest charges. But there are specifics to be aware of. In this article, you can learn all about how to avoid paying interest on credit card bills.

How does credit card interest work?

Credit card interest is the extra charge you pay when you carry a credit card balance. You can think of it as the fee you pay to the bank to borrow money. It increases the cost of the items you purchase using a credit card.

“Carrying a balance” refers to when you don’t pay off the full balance by the due date. You’ll only pay interest if you carry a balance.

To illustrate, consider these two scenarios:

• You make $800 in purchases and pay the full $800 balance by the due date. In this case, you’re not carrying a balance and won’t pay anything in interest.

• You make $800 in purchases but only pay $400 by the due date. In this case, you’re carrying a balance of $400 and will begin to accrue interest.

Credit card interest is measured in annual percentage rate (APR). The APR on your card will vary depending on your credit score and the type of card you’re using. On average, credit card APRs are around 20% — but they can range from less than 15% to over 35%.

The APR you receive will depend on several factors — most notably on your credit score and credit history. Depending on your credit score, some cards may not be available to you at all. If you’re just getting started with building credit, read through our list of the best credit cards for young adults.

If you have a card with a 20% APR and carry a $1,000 balance, you will accrue over $16 in interest charges in a month’s time. Carrying the balance for a full year would result in interest charges of $200. These simplified calculations ignore the impact of minimum payments, but they help illustrate the basics of credit card interest.

Interest compounds daily, which means that interest charges are added to your balance on a daily basis. This increases your balance each day, which in turn increases the amount of interest you accrue.

In many ways, credit card interest can be a slippery slope. Once you accumulate credit card debt, it can be hard to get out of it.

Credit card billing cycles explained

A credit card billing cycle is the period of time between billing statements. Billing cycles are usually around 28 to 31 days long. However, they don’t typically line up with calendar months.

Your billing cycle and statement date will be determined when you first apply for a credit card. You can check your first statement to see the statement date or ask your card issuer for details. Billing cycles are consistent each month, so your due date should fall right around the same time each month.

All the purchases you make during a given billing period will be added to your next monthly credit card statement. For example, say you have a 30-day billing cycle. All the purchases you make during the 30-day period will be added to your next billing statement.

The billing statement will include all the charges made during that period and any fees or interest accrued. It will also include a due date, which is typically 21 to 25 days after the close of the billing cycle. The time between the statement closing date and the due date is referred to as the credit card grace period.

To illustrate, let’s look at an example.

• You have a 28-day billing cycle that begins on the first Wednesday of the month.
• All purchases you make during the next 28 days will be included on your next credit card statement.
• Your payment due date will be 21 days (3 weeks) after the statement date. This is known as the grace period.

Remember that credit cards don’t charge interest unless you carry a balance. This means that a purchase made at the beginning of a billing cycle technically doesn’t need to be paid for 7 weeks or more — all without interest.

How to avoid interest on credit cards

Credit card interest adds significantly to the cost of any purchase you make. At the same time, there are substantial benefits to using a credit card, including the rewards they earn on each purchase.

How can savvy credit card users take advantage of the benefits without paying the costs? There are two main ways to avoid interest on credit cards.

Paying your balance in full

The simplest method is to pay your balance in full each month.

Every purchase you make during a billing cycle will be added to the next billing statement. From there, you have until the end of the grace period (usually 21 to 25 days) to pay off the statement balance.

As long as you pay off the full balance within the grace period, you won’t owe anything in interest. This allows you to still earn credit card rewards without paying a dime in interest.

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Utilizing 0% interest promotions

Certain credit cards may offer limited-time promotions that include 0% interest. For instance, a new card may offer 0% interest for the promotional period of the first 12 months.

With these kinds of promotions, you can carry a balance without paying interest — but only until the end of the introductory period.

These promotions are often only for new credit card applications. Existing cards you already have likely won’t offer these promotions, so you may need to apply for a new card in order to benefit.

Some savvy credit card users may use credit cards with high limits during these promotional periods, allowing them to essentially use an interest-free loan for a certain period.

However, be cautious with these promotions. There are two things to keep in mind:

• You still need to make minimum payments each month. If you miss a payment, you can invalidate the 0% promotion, and interest will start to accrue.
• Once the promotional period is over, interest will begin to accrue. If you have a significant balance built up, this can result in high interest charges.

Some of these promotions also allow you to transfer existing credit card balances to the new card. In this case, you might be able to save interest on the debt you already have on other cards.

How to reduce interest costs on existing credit card debt

If you have existing debt on credit cards, you’re already accruing interest at your current APR. Given that credit card interest rates are quite high, exploring options to lower interest costs on these balances is worthwhile.

Debt consolidation loans

Debt consolidation loans allow you to borrow money to pay off credit card debt. If you can get a loan at a lower interest rate, this will help you save money on interest.

For instance, if you have three credit cards with balances of $2,000, $1,500, and $1,500, you could take out a $5,000 debt consolidation loan. You would then use these funds to pay off the three credit cards.

Now, you’d be left with only one monthly payment on your new debt consolidation loan. This simplifies your monthly payments.

If you have a good credit score, you should be able to get a debt consolidation loan at an interest rate that’s lower than your credit card APR. Just be sure to account for any other costs or fees associated with the new loan, such as origination fees.

Balance transfers

Balance transfers allow you to take existing debt on one credit card and move it over to a different card. The main reason to do this is to take advantage of a lower interest rate on the new card.

Consolidating debt via balance transfer cards can potentially help you save money on interest — particularly if you utilize a 0% interest promotional rate (see above).

There may be fees for balance transfers — often 3% to 5% of the balance transferred — but this is often worthwhile if it will save you a substantial amount of interest.

Prioritize the highest interest rates

If you have debt from multiple sources, it’s wise to prioritize paying off the highest interest debts first.

For example, consider a situation in which you have the following debts:

• Credit card A with 17% APR
• Credit card B with 22% APR
• Credit card C with 19% APR

In this case, it makes sense to prioritize paying off credit card B first. However, you’ll still need to make minimum payments on the other two cards.

The same principle applies to other types of debt. For instance, if you have a car loan or mortgage, the interest rate is likely lower than the APR on your credit card debt.

Whenever you have extra money to put toward your debts, prioritize the debt with the highest interest rate to save the most money on interest.

Conclusion

The simplest way to avoid credit card interest is to pay your balance in full each month. If this is not an option, it may be wise to transfer your balance to a lower-interest card or consolidate your debt.

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