How to avoid and reduce credit card interest
Editor's Note
Any type of interest is annoying to pay, but we all especially want to avoid paying credit card interest as much as possible. It's why our first commandment of credit cards here at TPG is to pay your card balance off in full every month. This is because when you carry a balance, you accrue interest that far outweighs the value of any rewards you earn on your original purchase.
Here are some ways to avoid and reduce credit card interest.
The cost of accruing interest
What makes credit card interest so frustrating is how quickly it accumulates.
If you have a credit card balance of $100 and a 20% annual percentage rate, you'll be charged 5 cents on day one of your interest accrual. The next day, you'll accrue interest on your new balance of $100.05. Your second day's interest will round up to 6 cents.
After a month, you'll accumulate almost $2 of interest — already more than the $1.50 you earned in rewards if you put that $100 purchase on a cash-back card earning 1.5%.
This may not sound significant, but if your beginning balance is $1,000 instead, your interest after a month is around $17. And if your starting balance is $10,000, your interest is almost $170. This interest adds up quickly, so you'll want to avoid it as much as possible.
Related: Are you paying enough attention to your credit card's APR?
How to avoid credit card interest
Pay your credit card bill in full
The simplest way to avoid accumulating interest on your credit card is to pay off your bill in full every month. By doing this, you'll earn rewards without worrying about how much interest you're accumulating on a balance.
Take advantage of the grace period
Thanks to the Credit CARD Act of 2009, you must receive your credit card bill at least 21 days before your payment is due, and most credit cards don't charge interest during this period.
If you need a few extra weeks to pay off your balance, you'll likely be able to wait until the end of this grace period to pay before you start accruing interest. If you charge something to your card at the beginning of your cycle, this can give you just shy of two months to pay off your purchase.
However, not all cards have this grace period. Pay attention to your billing cycle, payment due dates and the fine print in your card's terms and conditions to ensure yours does.
Consolidate your debt
If you have balances on multiple credit cards, it might be worth paying a balance transfer fee to move all your balances to the card with the lowest interest rate to minimize your interest accrual.
Related: How to consolidate and pay off credit card debt
Use a 0% APR credit card
Some cards offer an introductory 0% APR for a period of time after you open the card. If you have an upcoming purchase that you know you'll need time to pay off, a great way to avoid accruing interest is to open one of these cards and use it to pay for your purchase.
Plus, you can transfer your balance from another card to your card with a 0% introductory APR to pay down your balance without accruing more interest. Most cards charge a balance transfer fee, but it's usually much lower than the interest rate you have on the other card; so, it's worth paying to save money in the long run.
Related: The best way to pay your credit card bills
How to reduce credit card interest
Use a debt repayment method
If you're in credit card debt, paying down your card balance is the best way to reduce your interest. This is easier said than done, but there are several strategies you can use to pay it down.
The most popular debt repayment strategies are the snowball and avalanche methods. The snowball method focuses on paying down your smallest debt first, while the avalanche method focuses on tackling your balance with the highest interest rate first. There's no right or wrong way to pay down debt, so choose whichever method feels the most doable.
Make multiple credit card payments per month
Since interest accrues daily after your grace period, you can reduce your interest by making credit card payments multiple times per month. Even if you can't pay the balance in full, paying what you can when you can allows you to accrue less interest than if you let it build all month and make just one payment when your bill is due.
Tap into savings to pay down debt
Often, the interest you earn in your savings account is much lower than the interest you accrue on a credit card balance. For instance, the average interest rate you'll earn on a high-yield savings account is around 4%, while the average credit card APR is over 20%.
If you have money in your savings account that you can use to pay down your credit card balance, you'll save more money by paying down your balance and avoiding more interest than you would earn with the money in your savings account.
Related: 3 reliable ways to pay off credit card debt
Bottom line
The easiest way to avoid paying credit card interest is by paying your account balance in full each month. However, you can also take advantage of your card's grace period or use a credit card with a 0% introductory APR to avoid paying credit card interest on your purchases for some time.
Even if you can't eliminate your credit card balance entirely right now, using a strategy to reduce your balance now can save you serious money in interest in the future.
Related: How to improve your credit score
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