In most cases, carrying a balance month to month on a credit card will trigger interest charges, which is essentially the cost of borrowing money from a credit card company. Compared to other types of debt, such as mortgages and car loans, credit cards tend to have higher rates of interest, which can make them an expensive way to borrow money.
One thing that people who use credit cards to their advantage have in common? They know how to avoid paying interest on credit cards. You can learn how, too. Here are some ways you might avoid interest on credit cards.
What’s an APR?
To understand how to avoid paying interest on credit cards, it helps to start by learning about credit card APR, or annual percentage rate. Basically, the APR is the rate of interest you’ll pay if you carry a credit card balance. Unlike the APR for other loan products, the APR for a credit card does not include any fees you may owe for using the card — it’s simply your interest rate.
Your APR on a credit card will depend on your creditworthiness as well as the current prime rate. Generally, borrowers with better credit will have better credit card APRs, meaning they may fall below the average credit card interest rate.
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When Is Interest Charged?
Credit card interest is charged if you don’t pay off your balance in full each month. If cardholders pay their entire statement balance by their due date, interest charges are typically waived.
When you carry a balance, interest accrues on a daily basis. Your daily interest charge is determined by dividing your APR by 365, the number of days in the year. Then, at the end of each day, the interest is calculated based on your average daily balance. Because this continues throughout the billing cycle, the interest you’re charged yesterday then becomes part of the balance on which interest is charged today.
Your lender will then tally up all of your daily interest charges at the end of the month and put that amount onto your card as a finance charge.
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How to Avoid Interest on a Credit Card
There are several strategies you can use to help avoid credit card interest.
Pay Off Your Balance in Full
If you’re wondering how to avoid credit card interest, one of the easiest methods is simply paying off your credit card balance in full each month. So long as you don’t carry a balance from month to month, you should never face purchase interest charges on credit cards.
To make paying off your full balance easier to do, you might consider making multiple payments throughout the month. That way, you don’t have to fork over one lump sum on your statement due date. Or, you could plan to check in on your balance regularly to ensure you’re going to be able to pay it off in full. The other benefit of paying off your full balance each month is that it can help you to build credit over time.
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Take Advantage of Your Grace Period
Paying off a credit card in full each month creates an additional opportunity to avoid interest on a credit card. Remember the grace period, mentioned in the last section? The grace period is the stretch of time between the end of your billing cycle and when a payment is due. During this time, no interest is charged on new purchases.
Confused? Let’s look at a hypothetical example: Say a cardholder’s billing cycle for the month ends on January 15, and they pay their credit card bill on February 10. On February 10, they are only required to pay the “statement amount,” which includes only the purchases made from December 15 to January 15.
However, the grace period applies to any purchases that are made after January 15, but that won’t technically require payment until March 10. In this way, a purchase could remain interest-free for longer than just one billing cycle.
Credit card issuers aren’t required to offer a grace period, but plenty do. However, many require the balance to be paid off in full during the previous one or two billing cycles to qualify. If you lose your grace period because you haven’t paid your balance in full, you’ll be charged interest on any unpaid portion of the balance. In addition, you’ll lose your grace period, and all new purchases will accrue interest beginning from the date the purchase is made.
Utilizing the grace period to its full extent is one way to avoid paying interest on a purchase for longer than just one month (or whatever the billing cycle happens to be). Before going this route, just make sure your card has a grace period, and second, that you qualify. If you have questions, never hesitate to call your credit card company to ask how and when you’re billed.
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Use a Balance Transfer Offer or 0% Interest Credit Card
A balance transfer credit card, or a credit card that temporarily offers a 0% APR, could be an enticing option for those who want to make major headway toward paying down a credit card balance. Keep in mind, however, that good credit (meaning a score of 670+) is typically needed to qualify for these offers.
If this is an approach you’re interested in, calculate how much you’d need to pay off each month in order to eradicate your balance. For example, if you have $6,000 you want to pay off during a 12-month 0% offer, you’d need to pay $500 each month. You’ll want to make sure you can realistically pay off the full balance before the promotion ends and the standard higher APR kicks in.
Also note that many balance transfers carry a balance transfer fee, which is usually around 3% to 4% of the amount transferred. Using our example from above, a $6,000 balance transfer with a 3% balance transfer fee would cost $180. Generally, this amount is added to the card’s total outstanding balance. Before pulling the trigger and transferring a balance, analyze how much you’d save in interest compared to the cost of the balance transfer fee.
There are a couple other potential pitfalls to balance transfers to keep in mind as well. For one, a balance transfer won’t get to the bottom of why you’ve racked up credit card debt in the first place. Some might find it too tempting to keep spending, and if more spending were to occur on top of the balance transfer, it could lead to unwanted interest charges. This could make it even harder to escape high-interest credit card debt.
Avoid Overspending
This may sound obvious, but it’s worth mentioning: To put yourself in a position where you can pay off your credit card balances every month, make sure your monthly spending doesn’t exceed your income.
This is easier said than done sometimes, but once you start racking up credit card interest, it can become even harder to pay off your full balance. You might consider making a budget and then vowing to stick to it to ensure you stay on track with your spending each month.
Plan Out Major Purchases
On a similar note to budgeting, another method for how to avoid paying interest on credit cards is by planning ahead for big purchases. If you know you have a pricey purchase coming up that you may need to spread out in smaller payments across a period of time, be strategic about how you’ll do it.
This could mean simply saving up ahead of time until you have enough stashed up to promptly pay off your balance. Or, you might time opening a 0% APR credit card with completing your major purchase.
Tips for Reducing Interest
Sometimes you can’t avoid interest entirely. Even in those instances, you shouldn’t give up entirely and give into interest. Here are some tips for reducing the amount of interest you pay.
Taking Out a Personal Loan
Though not an interest-free option, there are other ways to potentially lower how much you’re paying in interest on your credit card debt. One such option is taking out a debt consolidation loan that has a lower rate of interest.
A debt consolidation loan allows you to roll your debts into one monthly payment that’s a set amount and stretched over a predetermined amount of time. This can make budgeting easier. Plus, if you manage to secure a lower interest rate, you might be able to pay off your debt faster, thanks to saving money on interest.
Making Multiple Payments Each Month
Another tactic to reduce the amount of interest you pay is to make payments on your credit card balance throughout the month, instead of waiting until the due date. This helps because credit card interest is calculated on a daily basis, based on your average daily account balance. If you lower your balance with more frequent payments throughout the month, your average daily balance will be lower, thus reducing the amount of interest you’re charged.
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Trying the Debt Avalanche Method
If you find yourself staring down a mountain of debt, you might consider trying a popular debt payoff strategy: the debt avalanche. With this approach, you focus on paying off your debt with the highest interest rate first. Over the long run, this can save you on interest.
The debt avalanche method instructs that you apply any extra funds to your highest-interest debt, while maintaining minimum monthly payments on your other debts. Then, once that debt is paid off, you’ll move your focus to paying down your debt with the second-highest interest rate.
The Takeaway
If you were wondering how to not pay interest on a credit card, you can now see that there are several ways to do so. This ranges from paying your balance off in full each month to taking advantage of a 0% APR offer. And even if you can’t avoid interest entirely, there are ways to reduce the amount of interest you pay on a balance you’ve accrued.
It also helps to find a credit card with a competitive APR just in case you ever end up needing to carry a balance. With the credit card offered by SoFi, you can have your APR reduced by 1% after making 12 monthly on-time payments of at least the minimum due.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
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