Your credit card issuer offers the convenience of paying your credit card balance over a period of time. However, carrying a balance on your credit card from month to month usually means you'll have to pay interest, in the form of a finance charge. If you want to keep your credit card free, or at least lower the expense of having a credit card, that means avoiding credit card interest.
What's Wrong With Paying Interest?
When you pay interest on a credit card balance, you end up paying more for your purchases than you borrowed in the first place.
The higher your interest rate and the longer it takes you to pay off your balance, the more interest you will pay overall. Some credit cards charge interest daily, so a credit card that states an APR of 15% will actually end up costing you more than that if you do not pay off your credit card balance each month. For some people, that's lunch money for a week, a tank of gas, a month of cellular service, a college textbook, or a month's worth of diapers. You don't realize how much you're actually spending on interest because it's spread over a period of time and lumped in with your credit card payment, but that doesn't make it any less significant.
It's simple mathematics—decrease the amount of interest you pay and you'll increase the amount of money you have available to spend on necessary expenses.
In Theory, Avoiding Interest Is Simple
Generally, you can avoid credit card interest by paying your balance in full every month before the end of the grace period. Grace periods are at least 21 days. Credit card issuers must mail your billing statement earlier than the beginning of your grace period so you have time to take advantage of their grace period.
If you're like many people today and you simply can't possibly pay off a $1,000 balance at one time, then pay it off as quickly as possible—and try not to put any more debt on that card until you've paid off your balance. If you're paying your balance incrementally, you won't completely avoid interest, but you'll decrease the amount you pay.
Once you get into the habit of paying the least amount of interest as you can, be proactive to meet your no-interest goal. That means only charging as much as you can afford to pay off every month. Don't charge $1,000 on your credit card if you can only afford to pay off $300. Instead, give yourself a maximum purchase limit of $300. Use your budget to re-evaluate what you can afford to charge each month.
When the Grace Period Doesn't Apply
A grace period is necessary to avoid paying interest, but not all credit card balances have a grace period. For instance, you may not have a grace period if you already had a balance on your credit card at the beginning of the billing cycle. In other words, if you didn't pay off your balance last month, your new purchases may also be subject to a finance charge.
Some types of transactions—namely cash advances and sometimes balance transfers—don't allow a grace period. Interest starts accruing immediately on those kinds of transactions. The only way to avoid paying interest on a transaction without a grace period is to pay off the balance the same day you make the transaction—and that's usually not feasible.
Read the Fine Print
While it's rare, some credit cards do not provide a grace period at all. Do your homework and learn whether a credit card has a grace period by reading the credit card disclosure. Then, avoid the credit cards without grace periods altogether.
Interest-Free and Other Kinds of Promotions
Be careful with "interest-free," "same-as-cash," and "no-interest-if-paid-in-full" promotions. These are deferred interest financing plans that require you to pay the balance in full by the end of the promotional period—and often, that interest rate is exorbitantly high.
Frequently Asked Questions (FAQs)
What happens if a credit card balance isn't paid off before the end of an interest-free period?
Different cards may treat lingering balances differently after a promotional period ends. In a worst-case scenario, the card will charge deferred interest. This adds all the interest costs that would've accrued if the balance hadn't had a promotional period at all. Other cards may simply treat the lingering balance as a new balance that's subject to normal interest charges on the next statement.
What is a good credit card interest rate?
The average credit card interest rate is about 20%, so any rate below that could be considered a good rate.
How can you get a lower credit card interest rate?
Your credit card terms are negotiable, and you may be able to get a lower interest rate simply by asking for one. Your likelihood of getting a lower rate, a larger credit limit, or any other benefit will depend on how well you have handled your existing credit. Someone who keeps their credit usage to a minimum and never misses a payment is more likely to be successful in negotiations.