How to Avoid Credit Card Interest

The first rule of using credit cards: Avoid credit card interest. (Or at least it should be.)

The average credit card interest rate has climbed to 20.75% according to Bankrate, CNET’s sister site. With rates this high, it’s easy to see how credit card balances can quickly balloon beyond the original amount borrowed. This is especially true if you pay only the minimum payment, continue making purchases or both. 

Though some credit cards feature lower interest rates and the best balance transfer credit cards come with a promotional 0% APR period, you can avoid racking up interest charges completely if you’re able and willing to use credit cards in a specific way. Here’s how you can avoid credit card interest now and in the future.

How to avoid credit card interest

You can avoid credit card interest by paying off your balance every month. Making a plan for how you’ll use cards for purchases and pay your statement balance each month can help you avoid racking up unmanageable balances, which can lead to overwhelming credit card debt. 

There are also several types of credit cards that let you avoid accruing interest for a limited time.

Here’s how to maximize the benefits of credit cards while avoiding credit card interest altogether.

1. Pay your credit card statement balance in full each month

Using your card only for planned purchases that you have the cash to cover is probably the best way to avoid credit card interest. Start by making a monthly budget or spending plan, then only charge planned purchases. For example, you can budget a set amount of money for groceries, gas and miscellaneous purchases each month, charge those purchases to your credit card then use the money you budgeted to cover your bill.

As long as you pay your credit card statement balance in full each month by your payment due date, you’ll never be charged a dime in interest.

2. Use an intro 0% APR card for new purchases

Some credit cards offer promotional introductory 0% APR periods, which typically last nine to 21 months. This means that, upon approval, a cardholder has that time to make purchases without paying interest charges, provided they make at least the minimum payment on their card on time each month. 

These offers provide consumers with some extra time to perhaps pay off a large purchase or unexpected expenses. However, the full balance must be paid off before the intro period ends or else the remaining amount owed starts accruing interest at the card’s regular variable interest rate.

3. Consolidate debt with a balance transfer credit card

Some cards also offer an introductory 0% APR on balance transfers for up to 21 months. Upon approval, you can consolidate other debts and avoid accruing interest during the introductory period as long as you make the minimum payment on time every month.

However, most cards charge a balance transfer fee, so you’d owe an additional 3% to 5% for every debt balance you transfer. However, getting a year or longer to pay down debt without incurring interest charges can more than make up for the cost of this fee.

Like introductory 0% APR cards, you should have a repayment plan in place before you apply for a balance transfer card, since any balance that remains when the intro offer ends will begin accruing interest at the card’s regular variable APR.

4. Don’t use your credit card for a cash advance

The best credit cards make it possible to access cash as well, either through an ATM or a credit card convenience check. However, credit card cash advances require an upfront fee, typically 5% to 10%. Credit card cash advance APRs are also typically higher than the regular APR you’ll pay for purchases.

Even worse, credit card cash advances don’t give you a grace period -- a period of time you have to pay your bill between your statement’s closing date and due date, before interest starts accruing. Without a grace period, this means you’ll be charged credit card interest on a cash advance from Day 1. 

What’s the best way to avoid this? Don’t use your credit card for a cash advance.

5. Use a debit card or cash

If you have a habit of overspending and want to spare yourself the temptation, you can use a debit card or cash to make purchases. You’ll often miss out on some of the benefits of using credit with this strategy, including the potential for the best credit card rewards -- although there are debit cards that offer cash-back rewards. However, avoiding debt can be worth missing out on credit card benefits.

Prepaid debit cards can also prevent you from spending more than the cash in your account if you prefer to use plastic for purchases but you don’t want a card that’s tied to your checking account.

6. Build an emergency fund

Even with a budget and the best-laid plans, anyone can get hit with unexpected expenses like medical bills. Having an emergency fund can help you cover these expenses while avoiding credit card interest.

Most experts recommend having at least three to six months of expenses in a dedicated account for emergencies like a job loss, a drop in income or a health crisis. By starting to build up this type of safety net, you can reduce the likelihood you’ll need to rely on credit cards for regular bills and household expenses in the future.

How credit card interest works

You’ll accrue interest on any balance on your credit card past the payment due date. You can find out the exact percentage by checking your credit card statement for your card’s annual percentage rate, or APR. 

Let’s say you made an emergency purchase for $3,000 on a credit card with a 20.75% APR. To avoid paying the late fee, which can also leave a blemish on your credit score, you make the mandatory minimum payment, which is typically equal to 2% of your balance, so $60.

By making only the minimum payment, nearly 80% to 85% of your monthly payment would go toward interest charges every month that first year. By making a $60 payment each month, it would take you nearly 10 years and would cost you $3,997 in interest alone -- nearly $1,000 more than the original amount you charged to the card.

The overall impact of interest decreases when you pay more than your credit card’s minimum payment.

Use a credit card payoff calculator to find out how long it will take you to pay off a balance and how much interest you’d end up paying.

How credit card interest is calculated

Credit card interest is calculated based on your credit card’s annual percentage rate, but it’s not added to your account annually as the name implies. Instead, credit card companies calculate the average daily balance you owe and charge a daily periodic rate that’s based on the APR and how many days are in your billing period. 

To calculate the daily periodic rate, divide the APR by the number of days in the year (typically between 360 and 366, depending on which formula the credit card issuer uses). 

You can then use that rate for calculating credit card interest: 

Average daily balance x daily periodic rate x days in billing period = interest charged monthly

As an example, let’s say you have an average daily balance of $1,500 on a credit card with a 23.49% APR and a 32-day billing period. Here’s how to figure out how much you’d owe in interest that month:

• 0.2349 / 360 = 0.0006525 daily periodic rate
• $1,500 x 0.0006525 x 32 days = $31.32 interest charge

How credit card debt affects your credit score

Also remember that credit card debt can cost you more than the interest you pay -- it can also damage your credit score. How much debt you owe makes up 30% of your FICO credit score, the most widely used credit score, and having too much debt can signal to creditors that you may be a credit risk. 

Using less than 30% of your available credit -- also known as your credit utilization ratio -- can help improve your credit score, and most experts say keeping it below 10% is better. So for every $5,000 in available credit you have, you’d want to use no more than $1,500 each month, and $500 or less would be preferable.

And however much credit you do use, you’ll want to pay off the entire credit card statement balance by the due date each month.