The major reason credit cards try to solicit you with welcome bonuses, rewards and travel perks is to improve their chances of collecting credit card interest. Credit card interest, otherwise known as an APR, or annual percentage rate, can easily add up to be more than late fees and annual fees combined. As a cardholder, it’s in your best interest to avoid credit card interest -- especially as interest rates rise as the Fed battles inflation throughout this year.
Credit card issuers charge interest on any balance that’s not paid in full by the end of your statement cycle. The average credit card interest rate is approximately 19% according to survey data collected by Bankrate, CNET’s sister site.
Though some credit cards feature lower interest rates, and other come with a promotional 0% APR period, you can avoid racking up interest charges with any credit card as long as you don’t carry a balance. Here’s a breakdown of how credit card interest works -- and how you can avoid it.
How credit card interest works
Interest will be charged on any balance left on your credit card past the payment due date. You can multiply the balance by the APR to see how much interest you would owe on that balance over the course of a year.
Let’s say you made an emergency purchase for $3,000 on your credit card. To avoid paying the late fee, which can leave a blemish on your credit score, you make the mandatory minimum payment. Let’s assume -- as is the case with many credit cards -- that the minimum payment is equal to 2% of your balance, and the APR is an average 18.68%.
In the table below, we see how making only the minimum payment mitigates your ability to chip away at your balance over time. By making only the minimum payment each month, the interest accruing on the remaining balance eats up roughly 75% of your monthly payment.
Breaking down credit card interest
| Month | Balance on statement | Minimum payment | Balance after payment | Interest charged over following month |
|---|---|---|---|---|
| 1 | $3,000 | $60 | $2,940 | $45.86 |
| 2 | $2,985.86 | $59.72 | $2,926.14 | $45.64 |
| 3 | $2,971.78 | $59.44 | $2,912.34 | $45.43 |
| 4 | $2,957.78 | $59.16 | $2,898.62 | $45.22 |
| 5 | $2,943.84 | $58.88 | $2,884.96 | $45.01 |
| 6 | $2,929.97 | $58.60 | $2,871.37 | $44.79 |
| 7 | $2,916.16 | $58.32 | $2,857.84 | $44.58 |
| 8 | $2,902.42 | $58.05 | $2,844.37 | $44.37 |
| 9 | $2,888.75 | $57.77 | $2,830.97 | $44.16 |
| 10 | $2,875.13 | $57.50 | $2,817.63 | $43.96 |
| 11 | $2,861.59 | $57.23 | $2,804.35 | $43.75 |
| 12 | $2,848.10 | $56.96 | $2,791.14 | $43.54 |
| Total interest charges over one year: | $536.32 |
It will take much longer to pay down the debt at this rate -- and you’ve already accrued $536.32 in interest over a year. Of course, the overall impact of interest decreases when you pay more than your credit card’s minimum payment.
If you can avoid late fees and credit card interest entirely, the perks and benefits of a credit card are all gravy. Here are the three best ways to avoid credit card interest altogether.
1. Make your credit card payments in full
All credit cards feature a “grace period” -- usually about four weeks long -- before your statement balance is subject to interest. Though your credit card bill will require you to make only a minimum payment by the due date, that will carry over a your balance plus interest charges to your next month’s bill. If you pay your statement on time and in full every month, you won’t be charged any interest.
Having an emergency savings fund will help avoid any unintended missed, late, or incomplete payments. Alternatively, you can set up credit card autopay which will automatically draft your bank account on the due date if you are prone to forgetfulness.
2. Use a 0% APR card
Some credit cards offer promotional 0% APR periods to incentivize applicants. When approved, a cardholder has between 12 and 21 months to make purchases without accruing any interest -- as long as you make your minimum payments on time. This can buy some extra time to pay off a large purchase, finance an emergency expense or transfer a balance on a card with a higher interest rate.
The key to using these cards is to pay off your full balance before the end of the 0% introductory APR promotion; otherwise you’ll get hit with interest charges.
3. Use a debit card or cash
If you have a habit of overspending and want to spare yourself the temptation, you can always use a debit card or cash to make your transactions. Prepaid debit cards prevent you from spending more than the cash in your account. Many banks will issue a debit card in conjunction with your checking account.
Alternatively, there are a few secured credit cards that don’t require a credit check, require a security deposit to act as your credit limit, and help you build credit. They are similar to debit cards with slight tweaks, and may be a good in-between solution. If you miss a payment, some secured credit cards will take the balance right out of your security deposit, preventing you from overspending.
The bottom line is that no matter which route is best for you, it’s increasingly important to avoid credit card interest. Figure out a plan to enjoy more of your money.
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