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The cost of using credit cards is starting to get more expensive for American consumers due to rising interest rates. When federal interest rates go up, the variable rate on credit card interest typically goes up as well. For consumers who have relied on lower interest rates for their credit card spending, now is a good time to learn more about ways to avoid paying high credit card interest as inflation continues to burden consumers on all fronts.
How does credit card interest work?
Credit card interest is what you pay a lender in exchange for borrowing money when you use the credit card. Credit card companies charge interest daily or monthly (depending on the card) on the unpaid balance after the grace period expires.
The grace period is typically the time in between the end of a billing cycle and the payment due date. For some companies, the grace period can be more than 30 days. During this grace period, consumers are not charged interest as long as the credit card balance is paid in full by the due date. Check to see the specific rules for your credit cards, as your grace period may be different.
How is credit card interest calculated?
Banks calculate credit card interest by applying the annual percentage interest rate to the average daily balance of purchases. Some banks may compound interest daily or monthly, where you could be paying interest on your interest charges, so your calculations may vary slightly from the actual bank calculation.
Here is an example of how credit card interest is calculated using the average daily balance:
- Determine your daily rate:
- Divide your card's APR by 365 to find the daily rate. For example, if a credit card has an APR of 16.98%, the daily interest rate charged is 16.98% divided by 365, which equals 0.000465 per day.
- Find your average daily balance:
- This is your balance for each day of the billing cycle. Add up your balance for each day (Day 1+ Day 2 + Day 3, etc.) and divide it by the number of days in the billing period, which is usually 30 days. You will need to look at your credit card statement and figure out what your balance is each day.
- For example, if you spend $500 on day 1 (and nothing afterward), and that was your balance every day for that billing period, your average daily balance would be $500.
- Calculate your interest charges:
- Take the average daily balance (from step 2), multiplied by the daily rate (from step 1), multiplied by days in the billing cycle (30 days).
- Using the example numbers above: $500 x 0.000465 x 30 = $6.98 is the estimated amount of interest you'll be charged for that month.
Depending on how much you spend in a month, the interest charged may not seem high, but it can add up over time if you continue to carry over a balance.
Where can I find my credit card’s interest rates?
Most credit card companies disclose their credit card rates in the fine print at the end of each monthly statement. This section usually covers how the company charges interest and the grace period to pay for a purchase in full to avoid paying any interest charges.
In some cases, different balances are subject to different rates, which may include:
- Regular purchases
- Balances under promotional rates
- Balance transfers
- Cash advances
You will also find this information about the credit card interest rates in your cardholder agreement. Be sure you check the current cardholder agreement so you know exactly how much interest is charged on your spending.
Ways to Avoid Paying Credit Card Interest
If you're feeling the financial pinch and concerned about paying more interest on your purchases, here are some strategies that can help avoid paying interest on credit cards.
Use Debit Cards
One of the most basic ways to avoid paying credit card interest is not to use credit cards at all, and instead use debit cards. Debit card usage is limited to the cash you have on hand, so you are less tempted to spend what you don't have. Be aware that if you do overspend, you may have to pay overdraft fees.
Pay Off Your Balance Every Month
When the credit card bill comes, pay the statement balance in full by the due date. Avoid charging more than you can afford so you have enough funds to pay off your balances every month.
To help you avoid overspending, create a budget so you know exactly how much you have allocated for your credit card spending.
Buy Now, Pay Later
Buy Now, Pay Later programs offered by merchants and online payment systems allow certain purchases to be paid for over time, interest-free. These typically involve making installment payments over three to 12 months. If you have a large purchase and want to pay it back in smaller increments without worrying about interest, this may be a good option to consider.
Look Into 0% Interest Promotions
Some cards come with promotions that offer an introductory period with 0% APR. These cards may be useful if you want to make a large purchase, and you can pay it off interest-free during that promotional period. Just be sure to keep track of the exact date when any unpaid balances start accruing interest.
You can set up auto-pay to automatically pay the outstanding balance when it comes due. Just make sure you keep an eye on your expenses so you always have enough funds in your auto-pay account to avoid paying bank fees on overdrafts.
Avoid Cash Advances
Some credit card companies charge a fee for a cash advance. The interest rate is typically higher for a cash advance than for regular purchases on your credit card. Additionally, interest charges accrue immediately and there may be no grace period, so cash advances can be costly.
Use Balance Transfers Wisely
Some credit card companies allow you to transfer balances from one card to another card, usually from a higher-interest card to a new card with a lower rate. When used wisely, balance transfer cards can be an effective way to help tackle high-interest debt by reducing the overall interest that is paid out.
Balance transfers can be tricky and come with a lot of fine print, so read all the details to ensure you fully understand all the terms and conditions of your credit card account and the balance transfer procedure, including any prohibitions, fees or limitations.
The Bottom Line
As of mid-2022, Americans have spent more than $841 billion on their credit cards. Americans are now closely watching their spending due to inflationary pressures and being more cautious about what they buy with high-interest-rate credit cards. Finding ways to minimize interest on credit card spending is one way to keep your finances in check so you can avoid falling further into debt. If paying off the full balance is challenging, consider paying more than the minimum payment to lower the amount of interest you will be paying overall.
If you establish a good on-time payment history with your credit card company, you may ask for a lower rate for being a good customer. There is no guarantee this is possible, but it can't hurt to ask.
Moreover, suppose you cannot pay your credit card debts and are struggling financially. In that case, you may be able to negotiate a lower credit card interest rate to make the payments affordable to you. Lenders usually would rather get something than nothing and may lower your payments or interest rate to help you avoid bankruptcy.
The annual percentage rate (APR) is the rate used to calculate yearly interest charges. The APR is applied when an outstanding balance is carried over to the next month.
Yes, as long as you have adequate credit limit remaining on the card, you can still use it. The common rule is that a credit card company or a bank applies a payment made on the day it is received, but there may be a cutoff time, such as 5 p.m., and the payment might not show it has been posted until the next business day.
However, if you have maxed out your card and paid it off the same day, it might make sense to wait until the payment is posted before making purchases with the card again.
To avoid paying credit card interest, you need to pay off the entire statement balance due before the grace period for any purchases made.