How to Avoid Paying Interest on Credit Cards

John Ganotis

John Ganotis

Updated Aug 21, 2019

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Loans Are Not Usually Free, But Credit Cards Can Be

Whenever you get a loan, you’ll usually have to pay interest. Even though credit cards are a type of loan, you can avoid interest fees completely with most cards.

Interest is a fee you pay a lender for borrowing their money. Most of the time it’s a percentage of the amount you borrow.

Here’s a simple example of how credit card interest works: Let’s say you borrow $1,000 at a 20% annual interest rate. After a year, you would owe $1,200. This is because you need to pay back the $1,000 you borrowed plus the interest fee, which is 20% of the amount you borrowed. Since 20% of $1,000 is $200, you owe $200 in interest. Credit card interest is a little more complicated, but it’s the same idea: when you borrow money, you’ll pay a fee.

With credit cards, the interest rate is called an Annual Percentage Rate, or APR. The APR is the effective interest rate you’d pay if you borrow money on a credit card for a year, like in the example above.

Credit cards are a type of loan: When you use a credit card you’re borrowing money until you pay your bill. Because it’s a loan, you might expect to always pay interest. Yet with most credit cards, you can avoid paying interest completely.

Many credit cards will have several different APRs:

  • Purchase APR –  This is the APR credit card companies charge on normal purchases. It’s sometimes known as the Regular APR. Most cards have a “grace period.” This means there are no purchase interest charges if you pay your credit card bill on time and in full each month.
  • Balance Transfer APR – When you transfer a balance from one credit card account to another, this is the APR you’ll pay on that debt. Sometimes it’s the same as the Purchase APR, but it can be different. Most banks start charging interest on balance transfers immediately unless the card has an introductory balance transfer APR.
  • Cash Advance APR – If you use your credit card to withdraw cash at an ATM, you’ll pay this rate. Interest charges usually start the day the cash is withdrawn, so there’s no grace period. This APR is often higher than the Purchase APR, and there are usually other fees in addition to the APR.
  • Introductory APR – Some cards offer a lower intro APR, often 0%, for a limited time after opening the card. This could be for purchases, balance transfers, or both. It’s “introductory” because the special lower interest rate only lasts for a limited time period.

Avoiding Interest on Regular Purchases

Most credit card offers include a grace period for “new purchases.” The grace period extends from the time you make a purchase to the due date of the monthly billing cycle when you made the purchase.

As long as you pay off purchases by the time your monthly statement is due, the credit card company doesn’t charge interest on them.

When you pay any amount less than the new balance — only the minimum monthly payment, for example — you’ll have an unpaid credit card balance that carries over to the next month.

Interest charges will accrue on these unpaid balances. When you don’t pay your full balance, that’s sometimes called “carrying” or “revolving” a balance. And, if you pay less than the minimum payment, you can also end up with late fees.

To avoid a finance charge, all you need to do is pay off your statement balance in full by the time your credit card bill is due every month. You can do this when you get your statement in the mail, or any time before the bill is due. Most credit card issuers will let you connect a checking account to automatically pay the full statement balance on the due date.

To help illustrate this idea, imagine you have a separate checking account from your main account. Every time you make a credit card purchase, you could transfer that same amount into your second checking account. At the end of the billing period, your second checking account should have the exact funds needed to pay off your credit card statement balance in full. Although it wouldn’t be too practical to transfer money like that every time you make a purchase, this could help you think about setting money aside to pay your bill.

While most credit cards work this way, not all credit cards do. With some cards, you’ll be charged interest on purchases immediately. Other cards start with a grace period, but it’s possible to lose the grace period if you make a late payment, for example. Making a particularly late monthly payment could also damage your creditworthiness and cause your issuer to establish a penalty APR — a higher interest rate that’s designed to make up for your risk as a borrower.

Make sure you read the terms and fine print for your card to find out how its grace period works.

But there’s one more thing. Aside from allowing you to use credit cards interest-free, paying down your statement balance will help minimize your credit utilization (your total amounts owed versus your overall combined credit limits), which can benefit your credit scores considerably. That’s because whatever outstanding balance you’re carrying when a statement is generated is what appears on your credit reports. And because your amounts owed accounts for 30% of your credit scores, you’re nearly always better off keeping that number to a minimum, even when you have quite a bit of available credit.

To become an expert at understanding your credit card bill and avoiding interest, read our guide to How Paying a Credit Card Works.

Avoiding Interest on Balance Transfers

Some cards offer a 0% introductory APR for balance transfers. Banks often design these offers to attract new customers. A balance transfer can reduce the cost of credit card debt.

If you get a new credit card with a 0% introductory balance transfer offer, you can usually avoid paying interest by paying off the debt within the introductory period. Late or returned payments usually end the 0% introductory period, so always pay on time.

Also, watch out for the terms of your card. Some cards come with a 0% APR intro offer for purchases, but you can lose that if you transfer a balance to the card.

If your card does not have a 0% introductory offer, interest on balance transfers usually starts accruing immediately. You won’t be able to avoid interest unless you can somehow pay the balance the same day you make the transfer. The bank will usually charge a fee to transfer a balance, too, unless there is a special promotion.

Avoiding Interest on Cash Advances

Unlike regular purchases, interest will begin accruing immediately on cash advances.

This means you won’t be able to avoid paying some amount of interest on a cash advance unless you pay it off the same day. If you have the money to pay it off right away, though, you probably don’t need the cash advance in the first place.

Most credit cards will also charge you a fee for doing the cash advance, on top of the interest. A typical cash advance fee is 5% of the amount withdrawn, with a minimum fee of $10.

We generally recommend avoiding cash advances. They’re expensive and can negatively impact your credit history by showing lenders you’re being irresponsible with money. This may, in turn, make it harder to get low interest rates in the future.

Now that you’ve read this guide, do you understand how you can avoid paying credit card interest? Please hit the Ask button on the top right corner of this page to ask any questions you have. Or, just get in touch to say hi and let us know what you think of this guide.

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