How to Avoid Paying Interest

Avoid Paying Interest on Your Credit Card Balance

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Carrying a balance on your credit card usually means you'll have to pay interest, in the form of a finance chargeKeeping your credit card free, or at least lowering the expense of having a credit card, means avoiding credit card interest.

What's Wrong With Paying Interest?

When you pay interest on a credit card balance, you're essentially paying for the convenience of repaying your balance over a period of time.

The downside to paying credit card interest is that you ultimately pay back more than you borrowed and you have less money for daily living and reaching your financial goals.

The higher your interest rate and the longer it takes you to pay off your balance, the more interest you pay overall. For example, if it takes you a year to pay off a $1,000 balance with 15% APR, you'll pay $69.73 in interest. We could all make much better use of $70. For some people, that's dinner 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, but that doesn't make it any less significant.

Decrease the amount of interest you pay and you increase the amount of money you can spend in more useful places.

Avoiding Interest is Simple... In Theory

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 typically between 21 and 27 days. Credit card issuers must mail your billing statement earlier so you have time to take advance of the grace period.

"But I can't possibly pay off a $1,000 balance in a month!" you say. If you already have a balance you can't afford to pay in full this month, then pay it off as quickly as possible.

You won't completely avoid interest, but you'll decrease the amount you pay. For example, if you repaid the $1,000 balance in 6 months, you'd pay $31.31 in interest instead of $69.37. That's less than half the interest in half the amount of time.

In the future, 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 get a grace period. Interest starts accruing immediately on these 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.

That's often not feasible.

While it's rare, some credit cards do not give a grace period at all. You can learn whether a credit card has a grace period by reading the credit card disclosure. You want to avoid these credit cards, period.

Interest-Free and Same as Cash Promotions

Be careful with "interest-free" "same as cash" and "no interest if paid in full" type promotions. These are deferred interest financing plans that require you to pay the balance in full by the end of the promotional period. The terms of the promotion allow the credit card issuer to charge you the full amount of accrued interest if any of the balance remains after the promotional period. Only accept one of these offers if you can actually pay in full within the specified time period.