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How to Avoid Interest on a Credit Card and How to Reduce It

Catherine Hiles • June 12, 2024

A 23.85% interest rate causing a huge balance due on a credit card statement.

A credit card can be an excellent tool to have in your wallet. It allows you to pay for large expenses you might not be able to buy otherwise. Sometimes, you can even earn points or cash back for using your card. But there is a downside: credit card interest. Overusing your credit card can lead to ballooning interest, which can be hard to pay back.

Thankfully, it’s easy to avoid accruing interest on a credit card or reduce it if your card issuer has already charged you interest. By following some simple steps, you can learn how to use your credit card responsibly and limit the interest you pay or even how to avoid paying interest on your credit card altogether.

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What is credit card interest?

When you use a credit card, you borrow money from the issuer with a promise to pay it back, plus any fees and interest. Interest is how the issuer makes money.

When you make purchases with a credit card, you’re given a grace period of at least 21 days to pay off that purchase without incurring interest.¹ If you don’t pay off the entire balance by the due date, the credit card company will charge you interest on the remaining amount.

Credit card interest is expressed as an annual percentage rate, or APR, which takes into account the interest rate and other fees, like administrative fees. The APR on a credit card depends on several factors, like your credit score, the type of card you have, and the market interest rates set by the Federal Reserve.

How is credit card interest calculated?

Credit card interest can seem difficult to figure out. But to properly manage your finances, it’s in your best interest to learn.

Credit card interest is usually calculated using the average daily balance method. This involves a few steps:

  1. The credit card company tracks your total balance at the end of each day of the billing cycle.
  2. Your daily balance is multiplied by the daily interest rate – the APR divided by 365 days.
  3. At the end of the billing cycle, each daily amount is added together, and the total amount equals the interest charge for that month.²

To avoid surprises on your credit card bill, you should familiarize yourself with these calculations. Knowing how credit card interest is calculated can help you understand how even small purchases affect your interest charges.

4 ways to avoid credit card interest

Avoiding credit card interest can be very straightforward. The following four methods can help you learn how to avoid interest charges on a credit card altogether.

1. Pay your bill in full each billing cycle

The best and easiest way to avoid credit card interest is to pay your balance off each month. Even if you pay the minimum payment on your card, you’ll still be charged interest. However, you can skip the interest altogether if you don’t have a balance on your card.

2. Start using budgeting apps

Budgeting apps can help you track your spending. And when you keep tabs on your spending, you’re less likely to charge unnecessary purchases to your credit card. Using your credit card less will make paying off each billing cycle easier, helping you avoid paying interest.

3. Use a balance transfer credit card to consolidate debt

If you have a lot of high-interest credit card debt, a balance transfer credit card can help decrease the interest you owe. Essentially, a balance transfer card is like paying your credit card with another credit card, except you’re transferring the balance from several cards to a single card with a lower rate.

Some credit cards offer low or zero interest on balance transfers for a certain period. Transferring your balance allows you to pay down debt while accruing minimal interest.

4. Get a 0% APR credit card and use it for new purchases

Some credit cards offer a 0% APR introductory rate for customers with good or excellent credit scores. If you can pay off your purchases before the intro period ends, you can avoid paying interest altogether.

However, once the 0% period ends, make sure you know the APR. If you can’t pay off your balance in time, you’ll want to understand how much interest you’ll be charged.

New credit cards may take time to get to you in the mail. Learn more about how long it takes to get a credit card so you know what to expect when applying.

4 ways to reduce credit card interest

If you already have a balance, you can reduce the interest you pay in several ways. The following strategies can help you reduce your credit card interest:

1. Pay down debt using your savings

An emergency savings account can help when you need to pay for an unexpected car repair or medical bill – but it can also help pay down high-interest debt.

You may not want to use your entire emergency fund to pay down credit card debt, as you may still need that money if you lose your job or have to go to the emergency room unexpectedly. But if your emergency fund is well-padded, it could make sense to use some funds to pay down debt to avoid accruing more interest.

2. Use a personal loan to consolidate high-interest debt

Personal loan funds can be used for various expenses, from home improvement funding to debt repayment.

A personal loan often has a lower APR than a credit card, which makes it an excellent way to pay off some of your higher-interest debt.

3. Ask about credit card payment plans

Some credit card issuers offer payment plans with reduced interest rates to help manage larger balances. Not all offer such a program, but it’s worth asking if this is an option.

If it is, the card issuer will split eligible purchases into multiple payments over several months. In most cases, the fees on a payment plan will be lower than interest payments.

4. Negotiate a lower interest rate with your credit card provider

If you’ve had the same credit card for several years and have been good about making payments on time, call your credit card company and see if they’d be willing to negotiate a lower credit card interest rate. Most of the time, you can find the number to call on the back of your credit card.

If the answer is no, start researching cards with lower interest rates and applying for the one that best suits your needs. Then, use that card for new purchases to take advantage of the lower rate.

Why you should avoid credit card interest

Avoiding credit card interest helps you save money, but there’s more to it than that. It’s also about your financial health. High-interest credit card rates can make you feel trapped in a cycle of debt. That debt can be difficult to pay off and negatively affect your credit score.

When used responsibly, credit cards can help improve your credit while providing a safety net you can fall on when faced with an unexpected expense. There are many benefits to using credit cards regularly, including earning points or cash back, protecting your purchases, and building or rebuilding your credit.

By avoiding unnecessary interest on your credit card balance, you can keep more money in your pocket and focus on your long-term financial goals.

Avoiding credit card debt is simple

Avoiding and reducing credit card interest is critical to maintaining financial health and maximizing your hard-earned money. By implementing the strategies in this article, you can save on interest and quickly reduce your debt. The result is keeping more money in your pocket for future needs.

Learn how to read a credit card statement properly so you don’t miss your payment due date.

FAQs

When should I pay my credit card?

You should always try to pay your credit card bill in full by the due date. If you can’t pay in full, you’ll want to make at least the minimum payment to avoid late fees and negative impacts on your credit score. The due date is when you should pay your credit card in full to avoid interest.

Failure to pay your credit card bill could result in the issuer suing you. However, most credit card companies only sue customers as a last resort since the process is expensive and time-consuming.

Why was interest charged to my credit card after I paid it off?

This can happen due to residual interest, also known as “trailing interest,” which is the interest that accrues between the billing cycle end date and the date your payment is processed.³

Where can I find my credit card’s interest rates?

Your credit card’s interest rate is typically listed in your monthly statement. It can also be found in your initial credit agreement and online account.

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¹ From CFPB’s “What is a grace period for a credit card” as of May 27, 2024: https://www.consumerfinance.gov/ask-cfpb/what-is-a-grace-period-for-a-credit-card-en-47/

² From CFPB's "What is a 'daily periodic rate' on a credit card?" as of June 1, 2024: https://www.consumerfinance.gov/ask-cfpb/what-is-a-daily-periodic-rate-on-a-credit-card-en-46/

³ From CFPB's "If I pay off my credit card balance when it is due, is the company allowed to charge me interest for that month?" as of June 1, 2024: https://www.consumerfinance.gov/ask-cfpb/if-i-pay-off-my-credit-card-balance-when-it-is-due-is-the-company-allowed-to-charge-me-interest-for-that-month-en-48/

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