How to Avoid Paying Interest on Credit Cards
Loans Are Not Usually Free, But Credit Cards Can Be
Whenever you get a loan, you’ll usually have to pay interest. Even though credit cards are a type of loan, you can avoid interest fees completely with most cards.
Interest is a fee you pay a lender for borrowing their money. Most of the time it’s a percentage of the amount you borrow.
Here’s a simple example: Let’s say you borrow $1,000 at a 20% annual interest rate. After a year, you would owe $1,200. This is because you need to pay back the $1,000 you borrowed plus the interest fee, which is 20% of the amount you borrowed. Since 20% of $1,000 is $200, you owe $200 in interest. Credit card interest is a little more complicated, but it’s the same idea: when you borrow money, you’ll pay a fee.
With credit cards, the interest rate is called an Annual Percentage Rate, or APR. The APR is the effective interest rate you’d pay if you borrow money on a credit card for a year, like in the example above.
Credit cards are a type of loan: When you use a credit card you’re borrowing money until you pay your bill. Because it’s a loan, you might expect to always pay interest. Yet with most credit cards, you can avoid paying interest completely.
Many credit cards will have several different APRs:
- Purchase APR – This is the APR credit card companies charge on normal purchases. It’s sometimes known as the Regular APR. Most cards have a “grace period.” This means they don’t charge interest on purchases if you pay your credit card bill on time and in full each month.
- Balance Transfer APR – When you transfer a balance from one credit card to another, this is the APR you’ll pay on that debt. Sometimes it’s the same as the Purchase APR, but it can be different. Most banks start charging interest on balance transfers immediately unless the card has an introductory balance transfer APR.
- Cash Advance APR – If you use your credit card to withdraw cash at an ATM, you’ll pay this rate. Interest charges usually start the day the cash is withdrawn, so there’s no grace period. This APR is often higher than the Purchase APR, and there are usually other fees in addition to the APR.
- Introductory APR – Some cards offer a lower APR, often 0%, for a limited time after opening the card. This could be for purchases, balance transfers, or both. It’s “introductory” because the special APR only lasts for a limited time.
Avoiding Interest on Regular Purchases
Most credit cards have a grace period for “new purchases.” The grace period extends from the time you make a purchase to the due date of the monthly billing cycle when you made the purchase.
As long as you pay off purchases by the time your monthly statement is due, the credit card company doesn’t charge interest on them.
When you pay any amount less than the new balance, you’ll have an unpaid credit card balance that carries over to the next month.
Interest charges will accrue on these unpaid balances. When you don’t pay your balance in full, that’s sometimes called “carrying” or “revolving” a balance. And, if you pay less than the minimum payment, you can also end up with late fees.
To avoid a finance charge, all you need to do is pay off your statement balance in full by the time your credit card bill is due every month. You can do this when you get your statement in the mail, or any time before the bill is due. Most credit card issuers will let you connect a checking account to automatically pay the full statement balance on the due date.
While most credit cards work this way, not all credit cards do. Some cards begin charging interest on purchases immediately. Other cards start with a grace period, but it’s possible to lose the grace period if you make a late payment, for example. Make sure you read the terms and fine print for your card to find out how its grace period works.
Avoiding Interest on Balance Transfers
Some cards offer a 0% introductory APR for balance transfers. Banks often design these offers to attract new customers. A balance transfer can reduce the cost of credit card debt.
If you have a 0% introductory balance transfer offer, you can usually avoid paying interest by paying off the debt within the introductory period. Late or returned payments usually end the 0% introductory period, so always pay on time.
Also, watch out for the terms of your card. Some cards come with a 0% APR intro offer for purchases, but you can lose that if you transfer a balance to the card.
If your card does not have a 0% introductory offer, interest on balance transfers usually starts accruing immediately. You won’t be able to avoid interest unless you can somehow pay the balance the same day you make the transfer. The bank will usually charge a fee to transfer a balance, too, unless there is a special promotion.
Avoiding Interest on Cash Advances
Unlike regular purchases, interest will begin accruing immediately on cash advances.
This means you won’t be able to avoid paying some amount of interest on a cash advance unless you pay it off the same day. If you have the money to pay it off right away, though, you probably don’t need the cash advance in the first place.
Most credit cards will also charge you a fee for doing the cash advance, on top of the interest. A typical cash advance fee is 5% of the amount withdrawn, with a minimum fee of $10.
We generally recommend avoiding cash advances. They’re expensive and can show lenders you’re being irresponsible with money.
The Dangers of Promotional 0% Interest Rate Credit Card Balance Transfers
Many people turn to promotional 0% balance transfer credit cards to help them consolidate their high-interest debts or to participate in credit card arbitrage (using low interest debt to fund high interest savings accounts). In another post I’ll cover why these types of moves might benefit you. Both basically involve leveraging the interest rate on the card during the promotional period.
I used balance transfers like this when I was paying down my high-interest debt. And I ended up saving some money in the process. I haven’t written on this subject yet because I first wanted to touch on some of the dangers of doing this. While there are some definite financial benefits to using these balance transfers there are some things to watch out for that can make a good deal turn sour pretty quick. After all, credit card companies wouldn’t offer up these deals if they weren’t financially rewarding for them and not you. The truth is, though, that over the past couple of years, credit card users have wised up and started doing these deals the right way or simply avoiding them altogether. Anyway, here’s some things to keep in mind if you ever want to use a 0% balance transfer credit card.
Paying Balance Transfer Fees – The first thing you’ll want to watch out for are the balance transfer fees that the credit card companies are going to want to charge you to make the transfer. A typical fee is around 3% of the amount you are transferring. Some card companies set a cap limit on this around $75. Ideally you’ll want to pay no transfer fees for these deals. But that’s getting harder and harder as the card companies have wised up to users taking advantage of these promotions. How do you avoid the fees? I’d first try calling the card company up and asking them if they will waive it for you, or at least cap it at a lower level. If they won’t budge then look for one of the few remaining cards out there that don’t charge a fee. Fees of course can negate any money you save with doing the transfer. So avoid them at all costs.
Missing a Payment – Okay, let’s say you’ve transferred your balance over to the new card and it’s sitting pretty at 0% interest. A month goes by and you forget to make the minimum payment. Not good. According to many of these deals, your 0% rate could instantly go away and you’re back to a ridiculously high interest rate. Maybe even higher than your original rate. You don’t want to miss a payment. Set yourself a reminder on a work calendar or something. Make this balance a real priority so you stay on top of it and avoid losing your promotional rate.
Paying the New Balance Off Too Early – Paying off your credit card balances are always a good idea right? Well, if you’ve gone through the trouble of making a balance transfer to a 0% interest rate card then you are wasting all that effort if you pay it off too early. There is no penalty usually for doing this (paying it off early), but it has an effect on the amount of money you are saving by doing the transfer. The best thing to do is to divide your balance up into the number of payments you’ll need to make before the promotional period is over. Then, just make that payment each month. That extra cash that you could potentially put towards prepaying this debt could be sitting in a high-interest savings account earning some nice interest for you. This all goes back to leverage. You want your money working for you, not against you.
Canceling the Old Card – You should think twice before canceling an old credit card. Your FICO score is based on, among other things, your credit history. If you close an old account just because you don’t have a balance there anymore, you lose that history and that could lower your credit score. So, once you pay off the old card with the transfer money, consider using it to pay a monthly recurring bill and simply paying the small amount off every month. If it’s a reward credit card you definitely want to make sure you cash in all the rewards before you close it. I understand though, if you’re just looking to get rid of all your cards and want them closed. If that’s your goal, then skip this warning.
Missing the Expiration Date – This is similar to missing a payment. The 0% promotional rate will expire anywhere from 3 to 18 months. Please, make sure you set yourself a reminder to have this new balance fully paid off by the time the promotional period expires. If you miss this date and by then you still have a balance on the card, many cards will void the entire promotional period and make you retroactively pay the interest rate as if the promotional rate wasn’t there. This is not good, and only negates the whole reason you made the transfer.
Don’t Put Purchases or Cash Advances on Top of the 0% Balance – Lastly, here’s another credit card company fine print move you want to avoid. Don’t use the promotional rate card for anything other than the transfer for the promotional period. Why? Because they apply your payments to the purchases or cash advances last. Thus, burying these high interest charges under your 0% balance transfer. This means if you have a large amount transferred, it will be a long time before you can make your way down to the purchases and cash advances to knock those out. During that long wait time, those charges will be racking up big time interest rate charges. Thus, making any cost savings from the transfer null.
You could still end up paying interest on a zero percent interest credit card offer
What could be better than zero percent interest for one year? Nothing, nada, free…right? Not exactly.
These kinds of promotional rates are common with credit card offers. They can be connected to:
- Balance transfer offers
- Pitches for low-cost ways to finance big purchases, such as “deferred interest” offers
- So-called “convenience checks,” which invite you to write checks against your credit account and pay the amount back within the specific promotional period
Credit card companies market these promotions as a way for you to save money.
But, what some credit card companies may not have been telling you is that new purchases could cost you more than you expect. While your transferred balance or your first big purchase has the zero or low annual percentage rate (APR) for the promotional period, any additional purchases you make with the card may get dinged with regular interest charges right away. The only way to avoid those charges is to pay off your whole balance, including the promotional balance and the new purchases, by the payment due date.
The marketing materials may have focused on one-time fees, such as balance transfer fees or deferred interest fees, and not provided clear and prominent information about the cost of new purchases due to the loss of the grace period.
Fall from grace
Most credit cards offer a grace period on purchases. The grace period – if you have one – is the time when you don’t have to pay interest on a purchase or other transaction. With most credit cards, you can avoid paying interest on new purchases if you pay off your whole balance by the payment due date each month.
However if you don’t pay off your entire balance by the due date, you will lose your grace period. Without a grace period, you will have to pay interest on new purchases from the date you make them. Carrying a promotional balance can cause you to lose your grace period or make it harder for you to get it back. This is why accepting promotional balance offers can cost you more than you expect.
We’rethat some of them may be at risk of breaking the law because of the way that they market promotional rates. We told them that their marketing materials should clearly, prominently, and accurately tell you that you will pay interest right away on new purchases if you accept a promotional offer but don’t pay off the entire balance, including the promotional balance, by the payment due date.
Avoid the interest
If you decide to accept a promotional offer, here are a few things you should consider.
If you usually don’t carry a balance:
If you usually keep your grace period by paying off your full statement balance each month, you can avoid interest by not making new purchases with the promotional rate card until you have paid off the entire promotional balance. Consider making your new purchases with cash, debit, or another credit card that doesn’t have a balance.
If you usually carry a balance:
If you already carry a balance on all your credit cards, consider paying with cash or debit. However, if you decide to use a credit card, compare the interest rates among your cards to decide which is the better deal for new purchases.
Also, make sure you make all of your payments on time, and for promotional and deferred interest balances, pay off the entire balance before the end of the promotional period.
How to Avoid Credit Card Interest Rates
The average American has a credit card debt of $4,717. With an interest rate of 15 percent, it could take over ten years to pay off the balance — and that’s assuming they don’t add to their debt.
Why does debt loom over credit card owners? The fact of the matter is many Americans only make the minimum payment of $189, which means they’re making up for their monthly frugality with huge interest payments. Over ten years, credit card owners will pay a total of $18,155 in interest alone — quite a cost for a credit card debt of about four thousand dollars.
The reason most people fall into the cycle of credit card debt is due to interest rates (also known as annual percentage rate, or APR). Credit cards have notoriously high interest rates — as much as 18 percent. Meanwhile, a home loan could have an interest rate as low as 3.75 percent.
Does that mean you shouldn’t use credit cards? Not necessarily. There are ways to avoid interest rates on your credit cards if you’re disciplined.
Pay Your Entire Balance
Credit card interest is basically the price you pay for the convenience of paying off your debt over time. You have a grace period (usually 21-27 days) to pay off your debt then the interest rate kicks in. If you can pay off the entire debt during that grace period you pay no interest. But, what if you can’t pay off the debt all at once?
Try to avoid only paying the minimum as much as possible. The interest you pay is based only on the minimum due, so if you pay more than that you’re paying down your balance. That means less interest overall and a shorter time to get out of credit card debt.
Transfer Your Balance
If you need to repair a large credit card debt, you could consider an interest-free balance transfer. Balance-transfer credit cards allow you to transfer your balance from one card to the transfer card. You typically have several months (often as many as 18 months) to make monthly payments interest-free.
However, there is a catch: be sure to read the fine print on these cards. At the end of the introductory period, balance-transfer cards typically have high interest rates. Be sure you can pay off the debt before you open a balance-transfer card.
Go with a Credit Union
If you qualify for a credit union, usually you can apply for credit cards with much lower interest rates. This means that, even if you can’t avoid paying interest altogether, you may be able to pay much less interest on your credit card debt.
Of course, the best way to avoid paying interest on your credit cards is to make purchases with cash. Credit cards can help you build good credit, but they can also get you deep into debt if you’re not careful. Never rely on credit cards to live month-to-month. Always pay with cash if using credit means you will be stuck paying minimum payments.
Possible to use balance transfers to avoid interest with major credit cards?
I recently paid off a balance transfer and then this thought occurred to me. Let’s say you have $3000 of debt outstanding on a credit card. The goal is not to pay interest while you work to save the $3000 to pay the debt off.
Is it possible to continue to transfer that debt around to different credit cards in order to avoid being charged any fees whatsoever?
I’m sure some people out there have some creative ideas on this.
- In theory, yes. In practice:
Most cards charge a 3% or so fee on balance transfer.
If you slip and let you balance go past “free balance transfer” time limits, you’ll quickly pay more in interest than you gained from keeping free credit around.
You’ll need an endless supply of free transfer cards to keep shuffling it around – what if one day it so happens that none is offering it right now and your current free transfer is about to expire? Again, you’ll pay a lot.
Doing this (opening new accounts frequently) may hurt your credit rating, which may hurt your chance of getting new deals, which would lead to problems described above.
So it can be gamed, but the odds are not on your side 🙂
- I disagree about the odds not being on your side. They are, as long as you remain disciplined about it. I’ve done this for years — I used to take the money via check and put it on a savings account, back when those with no balance transfer fees were easier to find. I made about $700 like that before interest rates got too low. It is true that opening a new account dings your credit a little, but doing that once every 1 – 1 1/2 years isn’t going to have much effect. The key is you MUST PAY ON TIME!! It does blow up if you don’t. Setting up auto-pay is useful for that.
- I have done this for years and have been quite successful at it. Two reason I even need to do this – desire to pay for engagement ring and pay for 150 person wedding without using my nest-egg/savings.
You need to keep a document that details when the free APRs run out, and you need to setup automatic payments of the minimum balance from your checking account so you ensure you do not miss a payment.
You need to understand when you are going to need to make big purchases of homes/apartments/cars so that you can ensure you aren’t doing this right before your credit score is being checked (Need to leave 12 months without opening new accounts before doing this).
I have been able to finance about $60,000 worth of unsecured debt paying between 3-5% interest per year. We have an unsecured credit line with Citibank that charges 14% and is capped at $10,000, and Discover Personal Loans charge around 14% as well (in pre-paid interest!).
I would say, all things considering, that this is a great deal if you don’t have a secured line of credit with a low interest rate.
It is something, however, that if you aren’t diligent can get away from you. From my experience I would rather pay a small amount of interest while allowing my savings and retirement to grow interest (hopefully greater than 3-5%) than pay the huge expense and start from zero. But if you miss a single payment on a 0 APR balance transfer they charge you all back interest concessions plus charge you a penalty rate.
Like many of the other posts, you need discipline to make this work.
- Sure of course you can do balance transfers like this but you are way late to the party and it has gotten to be pretty challenging finding new cards to transfer balances to.
Before the current financial crisis in the US you could get enormous amounts of credit (2-5 times a person’s annual income) and transfer balances to your bank account to collect interest . There were a bunch of ways to the transfer everything from direct deposit to your bank account to a balance transfer check payable to yourself to overpaying another credit card and requesting a refund. Over paying another account sets off a lot of red flags now days but other methods still work.
The financial atmosphere has changed a lot and there are very few available cards with no balance transfer fees or capped fees and the interest rates are a lot lower now so it really isn’t worth doing.