Credit cards are one of the most expensive ways to borrow money. That’s because the interest rates can be very high — 30% a year or more. But if you’re careful with your spending, you can have a credit card with the highest annual percentage rate in the world and never pay a penny in interest.
If you pay in full every month: APR doesn’t matter
When you pay your credit card balance in full and on time in a given month, two things happen that make your interest rate irrelevant:
- There’s no carried-over balance on which the card issuer can charge interest.
- You get a grace period on purchases in the next month. That means interest won’t accrue on new purchases until your next statement due date passes.
When you don’t pay your balance in full, your issuer will charge interest on whatever balance you carry over. In addition, interest can start accruing on new purchases from the day you make them.
All you have to do to avoid interest charges, then, is pay your bill in full every single month by the due date. That’s it. Don’t carry a balance, and you won’t pay interest.
If you don’t pay in full every month: APR matters a lot
If you carry a balance — meaning you don’t pay in full — you’ll rack up interest charges. Credit cards charge interest based on your average daily balance, so every day you’re carrying a balance on your card figures into the amount of interest you’re charged for the month.
When you carry a balance for a month, a year or five years, those daily balances can add up to a whole lot of interest. Our interest calculator gives you a sense of how much it can cost you:
Two things to keep in mind:
MAKE THAT MINIMUM PAYMENT
Even if you can’t pay your balance in full, it’s crucial to make at least the minimum payment on time. If you don’t, you’ll probably be charged a late fee, and your credit score could suffer. Stop paying entirely, even for a couple of months, and your card issuer might lower your credit limit. This creates a cascade effect. You miss payments, and your credit score suffers. Your credit limit is lowered, so your balance looks higher relative to your available credit, and your credit score suffers even more.
So make your minimum payments at all costs. That signals to the card issuer that you’re still here, and you’re still taking responsibility for your debts.
PAY EARLY AND OFTEN
Let’s say the due date has come and gone. You made at least the minimum payment on time, so you’re in good shape there. But you don’t need to wait until the next due date to take another stab at paying down your balance, or paying it in full. As soon as you have the money, you can make another payment to wipe out all or part of your debt. You’ll still pay interest, but the charges will be lower because you will have reduced your average daily balance for the month.
If you need to carry a balance
Since credit card interest can be so expensive, look for ways to lower your interest if you’re expecting to keep that debt around for a while. Balance transfer cards are a great option if you have good credit. Usually, you’ll start with a promotional 0% APR period during which you’ll pay no interest at all on balance transfers. That gives you anywhere from 12 to 21 months, depending on the card, to pay off your balance before the interest ramps up again.
Usually, though, you’ll pay a balance transfer fee of 3% or more when you move your balance over to the new card. There are just a handful of cards from big-name issuers that don’t charge balance transfer fees, or you can try a credit union.
If you don’t need to carry a balance
Now that you know that your APR means nothing unless you carry a balance, you can focus on a credit card’s other costs and benefits when you look at the options. Our credit card tool can help you compare offers by evaluating factors such as annual fees, reward rates and more.
Virginia C. McGuire is a staff writer at cheatgame.info, a personal finance website. Email: @vcmcguire.
Updated April 4, 2017.