Imagine spending $16 more for every $100 purchase. A new pair of shoes, expensive dinner out or just a parking space at a Los Angeles Chargers football game can cost $100. Add $16 to each expense — and we’re not talking taxes — and you’re really paying $116.
That’s because the typical credit card charges an interest rate of about 16 percent per year on balances. Some charge as much as 29 percent if you’re late on a payment and have to pay penalty interest.
Not carrying a credit card balance by paying the bill before the due date each month is the best way to avoid such extra charges. But that’s rare.
More than three of five credit card accounts carry a balance at least once from one month to the next, according to the Federal Reserve’s payments study.
And credit card companies may soon be raising rates. Credit card rates are tied to the federal funds rate, which the Federal Reserve is expected to again raise, as it has twice in 2017.
However much interest rates rise, there are ways to avoid paying credit card interest. Here are four:
1. Know the grace period
This is the most common way to avoid paying credit card interest, and it’s one you probably already know a little about. But it’s a little more nuanced than just knowing when your credit card bill is due.
Most people think they only have a month to pay off a credit card bill. By knowing their card’s grace period, they can see how much more time they have.
A grace period is the time allowed when you can pay off your credit card bill without paying any interest. It starts on the last day of your billing cycle and runs through the due date for that cycle.
Knowing what your credit card’s billing cycle is can give you about three more weeks to pay off purchases. The key, however, is not forgetting what the payment due date is and paying the full bill by that due date.
For example, a credit card’s billing cycle may start on the 23rd of one month and end on the same day a month later, such as May 23-June 23. The payment due date could be July 17. The grace period is June 24 to July 17 — about three weeks long.
Instead of having a month to pay the bill off, you now have about seven weeks.
To take advantage of this, make big purchases at the beginning of the billing cycle so you can have the maximum time to pay for them without paying interest. Obviously, only do this if you’re sure you can afford the big payment when it’s due.
Your credit card bill should detail what the billing cycle is, along with the payment due date, giving you the total grace period.
2. Pay as you buy
If you really want to be diligent on avoid interest charges, pay off charges on your credit card as soon as you make them.
Credit card companies are happy to accept payment any time you want, even multiple times in a month. So every time you make a purchase with your credit card, immediately transfer money from your bank to the credit card company for the same amount.
You can often do this through your credit card’s app on your phone, or can set up weekly payments of a certain amount if you expect to make so many purchases per week.
It can be a lot of work, but can become an easy habit to only buying what you can immediately afford. Make it a routine each night after dinner by going online to make a credit card payment after adding up the day’s charges.
3. Switch credit cards
This is a one-time move, but if you have a high credit card balance that you’re paying a large amount of interest on and can afford to pay it off over a year or so, you can transfer the balance to a 0 percent card.
Some credit cards have introductory offers of no interest for up to 18 months for balance transfers.
By dividing the transfer amount into 18 months of payments, the new card can allow you to pay off the balance without paying interest during the promotional period. But it comes with a few big caveats:
- If you don’t pay the balance off during the promotional period, you’ll may be charged interest on the entire amount.
- Don’t add more purchases to the new credit card, which will increase your monthly payments.
When the introductory period ends, the interest rate could be higher than what you had before, so make sure it’s a credit card you want beyond the promotion.
4. Pay in full each month
If the above steps are too much work, then simply pay off the credit card bill in full each month.
Do whatever it takes to pay it by the due date. Send yourself email and other alerts, keep track of purchases to ensure you have enough money in your checking account to pay the bill, and stick to a budget.
Paying your bills on time will improve your credit score, and may eventually help you qualify for lower interest rates on credit cards. But best of all, paying your credit card bill in full and on time each month will let you buy things on credit and possibly earn rewards points without having to have cash upfront.