There are a lot of misconceptions out there about the proper way to use a credit card. One particularly wonky myth is that is that in order to maintain a good credit score, a borrower must maintain a balance at all times.
From a credit score standpoint, it may actually be best to pay off a credit card balance in full, each month.
In most cases, a balance being carried over 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 high rates of interest, which can make them an expensive way to borrow money.
That said, credit cards aren’t all bad, and can be used to the cardholder’s benefit. One such benefit of using credit cards responsibly is the opportunity to build up a solid credit score by making payments on time. Some people may use credit cards to earn cash back or airline miles for travel. (Vacation, anyone?)
One thing people who use credit cards to their advantage all have in common? They know how to avoid paying interest on credit cards. You can learn how, too. Here are a few ways you might avoid interest on credit cards, whether the goal is to rack up airline miles or simply avoid those sky-high interest charges.
What’s an APR?
To understand how to avoid paying interest on credit cards, it helps to start by learning about the Annual Percentage Rate (APR) on a credit card. Basically, the APR is designed to give borrowers a feel for the rate of interest they’ll owe on a credit card balance, plus fees associated with that card, stretched out over the course of a year.
So it’s not quite as simple as saying that an APR is a credit card’s rate of interest—an APR includes both the interest rate and all other costs involved in using a credit card, such as upfront costs and transaction fees.
APRs help make it easier to compare the true cost of a credit card across different card types and offers; any fees or other costs on the card are rolled in with the credit card’s interest rate to create an APR.
An APR also accounts for the fact that credit card payments are made monthly, not annually. And that for credit cards, interest is actually being calculated daily .
APRs: Need to Know Info
If you’re like most adults with a mailing address, you’ve received a credit card solicitation delivered via mail. They often come on beautiful, thick cardstock, emblazoned with photos of palm trees or some annoyingly gorgeous couple. Gold, glittery lettering across the front announce some “limited time offer,” such as a “0% Introductory APR” or a “0% Balance Transfer.”
These deals may sound good, but always read the fine print. Usually, a credit card has multiple APRs for different uses . For example, a credit card could have a different APR for new purchases, balance transfers, and cash advances. To find all the different APRs on a credit card, check what’s called the Schumer Box , a clear, easy-to understand display of the different APRs on any credit card offers.
You can also search for an agreement on a credit card’s website. If you still can’t find one, you can call to have one mailed to you—or you can check the Consumer Financial Protection Bureau’s database of credit card agreements .
Here’s an example of different APRs for the same card at work. Remember that card that sent you the fancy mailing advertising a 0% APR on all balance transfers? While the 0% rate applies to any transferred amount, it is unlikely that it applies to any new purchases on that same card.
All new purchases will be subject to an entirely different APR. And in some cases, making a purchase on the card may cancel the card’s grace period, subjecting all new purchases to interest charges from the date purchased, unless the entire balance (both the transfer and the new purchase) is paid off in full by the end of that month.
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Avoiding Paying Interest on Credit Cards
There are a few strategies you can utilize to help avoid credit card interest.
Paying off the Balance in Full
If you’re on a hunt to learn how to avoid credit card interest, one of the easiest ways to do this is by paying off the credit card balance in full, each month. So long as you don’t carry a balance over from month to month, ideally, you should never pay an interest charge.
This sounds obvious to say but it’s worth repeating: To put yourself in a position where you can pay off your credit cards every month, you can start by working to make sure that your spending doesn’t exceed your income. This is easier said than done sometimes, and credit card interest can make it harder.
Using 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 the new purchase. Credit cards aren’t required to offer a grace period, but plenty do, though many require the balance has been 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 the balance. In addition, you will lose your grace period and all new purchases will accrue interest payments beginning from the date the purchase is made.
Confused? Let’s look at a hypothetical example. Say that 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 from December 15 to January 15.
The grace period applies to any purchases 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.
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). To go this route, you should first make sure that your card has a grace period, and second, that you qualify. If you have questions, never hesitate to get on the phone with your credit card company and ask how and when you are billed.
Using a 0% Balance Transfer Offer or 0% Interest Credit Card
A card with a 0% balance transfer or similar 0% credit card offer could be an enticing option for those who want to make major headway in paying down a credit card balance. If this is something that you are interested in, calculate how much need to pay each month in order to eradicate the 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 be careful if you go this route. While there is certainly no shame in ending up with a credit card balance, a balance transfer also won’t get to the bottom of why there’s credit card debt in the first place. Some people might find it too tempting to keep spending and if more spending was to happen on top of the balance transfer, it could trigger unwanted interest payments.
Also, many balance transfers—even those offering a 0% introductory rate—can come with a balance transfer fee. Of the “best” cards for balance transfers according to NerdWallet (as of January 2019), a 3% or a 4% balance transfer fee is pretty standard.
Using our example from above, a $6,000 balance transfer with a 3% balance transfer fee would cost $180.
Generally, this amount is tacked on top of the total balance of the card. Before pulling the trigger and transferring a balance to a 0% APR card, take some time to analyze how much savings in interest you’d receive compared to the transaction fee rendered for moving the balance.
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 by consolidating your credit cards with a personal loan with a lower rate of interest.
Not only could a lower rate of interest save you money, but a personal loan could be a solid way to get yourself on an installment payment plan—one without the option of adding to the balance, as is the case with a credit card. A personal loan with SoFi may be able to help. Additionally, there are no hidden fees with a SoFi personal loan.
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