Short on Cash? Here’s How to Avoid or Minimize Credit Card Interest

Credit card interest charges can be very expensive, and they’ve only gotten worse this year, as interest rates rose. As of August of 2023, the most recent figures available, the Federal Reserve indicates that the average credit card interest rate for accounts assessed interest was 22.77%, up dramatically from 16.27% in Q3 of 2022.

Unlike some mortgages and student loans, credit card interest on personal credit cards is never tax deductible. And even if you earn credit card rewards, the cost of paying interest on your purchases is likely to exceed even the most valuable rewards you receive. 

How does credit card interest work?

When you use your credit card to make a purchase, you’re incurring interest on your charges based on your account’s average daily balance. But as long as you pay your statement balance in full (on or before the due date), you won’t incur any interest charges. The time between the end of your account’s billing period and the account’s due date is known as the grace period.

Fail to pay the entire statement balance during the grace period -- the time between the end of your billing period and your due date -- and you’ll owe interest on your account’s average daily balance. This means that each one of your charges will incur interest every day, starting on the date of purchase, and ending when payment is made. 

Why you should avoid accruing interest

With a current average APR of over 22%, incurring credit card interest can be extremely expensive. As the table below shows, making the minimum payment can easily cost you more than the value of your purchases, and take years to pay off.

When you’re able to avoid paying interest charges, you’ll not only save money, but you’ll receive what is essentially an interest-free loan. 

Tips to avoid or minimize credit card interest charges

If your goal is to minimize credit card interest charges, here are several ways to achieve this:

Treat your credit card as a debit card

When you make purchases with a debit card, you’re spending money from an attached bank account. As soon as the transaction is made, the funds are debited from your account, and you can’t spend more money than you have available. 

The easiest way to avoid credit card interest charges is to never make a purchase that you can’t immediately pay for with money that you already have. That way, it’s easy to always pay your statement balance in full. 

Delay major purchases

If you plan to carry a balance for a short period of time, there are ways to minimize your interest charges. Because you must pay your entire statement balance in full during your account’s grace period to avoid interest charges, try not to make large purchases during your current billing period if you’re short on cash.

For example, if your billing cycle ends on the 30th of November and your account has a 25-day grace period, then the charges you make before November 30th will appear on the statement with a due date of December 25th. But if you wait until December 1st to make a large purchase, it will only appear on the statement generated at the end of December, and be due on the 25th of January (by law, credit card payment due dates must be on the same day of the month, every month). 

And even if you can’t pay the entire statement balance and must incur interest, remember that credit cards assess interest based on the account’s average daily balance. You can figure out how much daily interest you earn by dividing the card’s APR by 365. 

By postponing major purchases, you can reduce your account’s average daily balance, and save significantly on your credit card’s interest charges. 

Use a low-interest rate card to carry a balance on some charges. 

One of the more challenging aspects of credit cards is that you are assessed interest on all of your charges if you fail to pay the entire statement balance, even by a little bit. 

If you have a single credit card with a balance of $5,000 and you are only able to pay $4,500, then you’ll still incur interest on the average daily balance of the entire $5,000.

But if you charged just $4,500 to one card and made that card’s payment in full, then you won’t incur any interest charges on that account. You could then charge the other $500 to a second, low-interest card, so long as you can make the minimum payment by the due date. You’ll save money by only incurring interest on that card’s $500 balance, rather than the entire $5,000 balance.

Use a credit card with a 0% introductory financing offer

There are many credit cards that offer interest-free promotional financing, either in the form of 0% APR on new purchases, balance transfers or both. These offers last from six months to sometimes as long as 21 months, although you will typically incur a 3% to 5% fee on balance transfers.

To effectively use an introductory 0% APR period, check to see if you’re able to pay off the new purchase or transferred balance within the given timeframe. You can find out how much money you’ll need to put toward the balance each month to pay it down to zero in time by dividing the balance by the number of months in the promotional period.

For example, if you make a $1,000 purchase on a card with an 18-month introductory period, you’d need to put about $56 toward the balance each month to pay it off in time.

If you’re unable to pay down the balance before the intro period ends, the balance will start to accrue interest at the card’s variable interest rate.

Make your payments early and often

If you’re carrying a balance on your credit cards, your highest priority should be paying off your balance while minimizing your interest charges. You can do this by making payments before your due date, which reduces your account’s average daily balance. In fact, you can make multiple payments each month. 

For example, if you receive a paycheck once a week, set up autopayments to pay your credit card bill each time you get paid. Just be sure to always make at least one payment after your statement is generated but before your due date, for the minimum amount or greater. 

If you make a payment during the previous billing cycle, before your statement is generated, make sure to also make a payment during your current billing cycle to avoid going into default.