How to Avoid Credit Card Interest

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Credit card account holders generally incur interest on the money they use from their line of credit each billing cycle. The toll this can have on their wallet may lead them to wonder how to avoid credit card interest altogether. The most common answer: pay in full on time. However, there are other methods that can save credit card users the financial pain of paying more than they borrowed.

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Credit Card Interest Explained

In a nutshell, interest refers to the cost of borrowing money from any type of lender, including credit card issuers. Credit cards allow cardholders to borrow money to pay for purchases in the front. The only condition is that they must pay it back plus any accrued interest that has been applied to their monthly statement.

With credit cards, interest normally comes in the form of a annual percentage rate — or APR. Banks and other issuers use a fixed formula to determine the APR cardholders must pay on their outstanding balance. The APR can vary depending on the type of loan and many other factors. Depending on the card, it can be calculated daily or monthly.

When do credit card issuers charge interest?

To understand how interest works, it’s important to understand the concept of a revolving balance. This is the unpaid portion of a cardholder’s debt that is carried over to the next billing cycle. A revolving balance is the most common cause of interest for credit card accounts – and any balance that has accrued interest is also charged interest on top of that, known as compound interest. It is the account holder’s responsibility to do their due diligence before applying for a new credit card to find out how their particular issuer will handle interest.

Types of credit card interest

Although the APR is the main type of interest charged for outstanding credit card balances, there are other rates associated with borrowing money. Sometimes certain accounts may also have different interest rates and fees for specific transactions and late payments. In order to avoid interest on their credit cards, cardholders should understand the following concepts.

Variable rates

This type of APR is based on an index that lenders look to when setting their rates. A variable rate APR can also be impacted by creditworthiness and late payments, depending on the card. Credit card agreements will indicate how this type of interest may change over time.

Fixed rates

These rates are more stable than their variable counterparts; however, they can still change over time. It is the issuer’s responsibility to notify cardholders of fixed rate adjustments in advance so that they can plan accordingly. Fixed-rate APRs can also be affected by late payments, but they don’t take an index into account.

Promotional rates

Some issuers offer special rates for new customers or those making a balance transfer. The rate may vary from one financial product to another, but some go down to 0% for the first few months, or even up to 21 months. Promotional and introductory rates are designed to attract new account holders, so they can be quite generous.

Can you avoid paying interest on a credit card?

The short answer is yes. There are many ways to avoid credit card interest, the most obvious being to pay your bill so you don’t have a balance. Here’s more about the most common methods.

Pay the bill in full each cycle

This is perhaps the most obvious technique for keeping credit card debt at bay and avoiding interest. Most credit card issuers give account members a grace period to pay their balance in full before charging interest. However, any revolving balance carried over to the next cycle will result in the loss of this privilege and the immediate accumulation of interest on new purchases.

Take advantage of introductory and promotional APRs

0% introductory APR allow cardholders to finance large purchases without having to worry about interest. Judicious use of this privilege can allow them to avoid any large payments, even if they are unable to pay their balance in full for the duration of the promotion. Still, account members should be aware of their introductory APR duration and promotion terms before spending that money. This way, they can avoid any nasty surprises down the line.

Avoid cash advances

Cash advances refer to money withdrawn from an ATM using a credit card. These transactions do not benefit from a grace period; they immediately start accruing interest, which tends to be higher than the APR incurred for normal credit card purchases. Additionally, most issuers also charge a cash advance fee, which is typically over 5%.

Use balance transfers

Sometimes account members can withdraw their outstanding credit card balance and transfer it to a new account with an introductory APR of 0%. This allows them to avoid paying interest until the end of the promotional APR on their new credit card. It’s a great way to minimize credit card debt, especially for those who owe a large sum of money. It can even allow cardholders to pay off their old balance in full without having to worry about interest if they play their cards correctly.

How much should you pay on your credit card to avoid interest?

Pay the balance in full each cycle is the best way for cardholders to stay out of debt and avoid interest. The amount owed will vary from customer to customer, simply because everyone has different spending habits and will owe different amounts.

Some introductory APRs may allow cardholders to pay off only a small portion of their balance each cycle without incurring interest until the promotion expires. Nevertheless, debtors should exercise caution and check their credit card agreement before making a final decision that could increase their interest over time.

Final grip

Credit card interest rates are rising Nowadays. That’s why more and more customers are looking for different ways to bypass these high fees and only pay for what they borrow. The above guide aims to enable cardholders to reduce their debt and play smart when it comes to interest. Paying their balance in full and being responsible for the amount they borrow each cycle will help any credit card owner avoid financial trouble.

This article originally appeared on GOBankingRates.com: How to Avoid Credit Card Interest

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