Avoiding credit card interest

Whether you’re repaying a debt or making purchases, keep your credit card bills free of interest charges by following a few clever tips.

High interest rates represent the most lethal aspect of credit cards. Collecting interest is usually what leads to debt and can make credit card repayments unmanageable. However, there are ways you can avoid it altogether. From 0% balance transfer offers to interest-free days on purchases, use this guide to discover how you can cut your credit card interest costs.

How to avoid paying interest on your credit card

There are a few ways that interest can be charged on your credit card and it’s important to understand how they work so that you can avoid them accordingly. Here are several ways to avoid paying different types of interest on your credit card:

1. Get a 0% purchase credit card

One of the ways you will collect interest on your credit card is by making purchases. This is the interest charged on eligible purchases at the purchase interest rate (which was approximately 16.92% on average in July 2015). However, the rate can range between 14% and 25% depending on the card. If you are planning on making purchases and think you might have trouble paying your balance in full by the end of the statement period, this is where a card with a 0% promotional rate could come in handy.

Cards with a low or 0% promotional rate on purchases let you repay your purchase balance without the cost of interest for the length of the promotional period (which usually lasts between 6 and 15 months). If you’re only repaying the amount you charged, rather than additional interest costs, you could potentially save hundreds or thousands of dollars. As this only lasts for an introductory period, the catch is that you’ll need to repay your entire balance before the promotion ends if you want to completely avoid interest. Once the promotion ends, the standard interest rate applies on any remaining debts and future purchases.

So, if you have some specific purchases in mind and plan to repay the entire balance before the promotional period ends, a credit card with 0% interest on purchases could come in handy.

2. Maximise your interest-free days

Many modern credit cards offer an ongoing feature of interest-free days. These only apply to eligible purchases and provide cardholders with a brief window to make interest-free payments. The number of interest-free days offered will vary from card to card, but usually they offer between 44 and 55 or sometimes even up to 62 interest-free days.This can help ease cash flow and allow more time to pay off your shopping, especially if you time it at the start of your billing cycle and can take advantage of as many interest-free days as possible.

There are two important things you need to know about accessing interest-free days. Firstly, you must have fully paid your account balance the previous month in order to enjoy interest-free days this month. Secondly, your 55-day period (or 44 or 62 days, depending on the card) begins on the first day of your statement or billing cycle. This means that you don’t technically enjoy 55 interest-free days on all purchases, unless they were made on that first day of the statement or billing cycle. Should you buy something on the last day of your statement or billing cycle, that purchase will unfortunately enjoy no interest-free days. See this guide for more information on how interest-free days work.

3. Repay your balance before the statement due date

Cashing in on interest-free days is just one of the reasons why you should pay your entire balance before the statement due date. If you’re able to do this, your purchases won’t collect interest and you’ll also get access to extra interest-free days for future purchases.

If you struggle to repay your balance on time, there are a few things you can do to get your repayments in check. It could be as easy as setting up reminders in your calendar or smartphone. Or you could set up auto-repayments to automatically transfer money from your bank account to your credit card each month. If you struggle to gather enough money to repay your balance each month, you could contact the bank to move your statement due date so it’s closer to your pay day. This might help manage your cash flow and ensure you have enough funds to repay your balance and avoid interest.

4. Consider a 0% balance transfer credit card

If you’re already struggling to repay a high-interest debt, a 0% balance transfer credit card could be the answer to your problems. A balance transfer is essentially when you transfer existing debt from one credit card (and sometimes even personal loans) to another. This means you can repay your debt without the cost of interest for as long as the 0% promotion is in place, which can be from 6 to 24 months.

Depending on your balance, this can result in sizeable savings that could instead go towards paying off your debt rather than paying interest. They’re not entirely cost-free, though. You might need to pay a one-off balance transfer fee and an annual fee, and will be required to meet at least the minimum repayment each month. It’s wise to pay as much as you can in order to pay off the entire debt before the promotion finishes though. This is because once the introductory offer ends, the remaining balance will collect the higher standard interest rate on purchases or cash advances. So if you want to avoid interest completely, calculate how much you’ll need to repay each month to pay off your entire balance before the revert rate kicks in. While you shouldn’t use your credit card for purchases if you’re concentrating on paying off your debt, some cards do offer 0% interest rates on both balance transfers and purchase rates in case you need to make an emergency buy.

5. Avoid cash advances

Cash advances also attract high interest rates on your credit card. They’ll vary from card to card, but cash advances usually sit in the 20% to 22% interest rate bracket, which accrues immediately and will also incur a cash advance fee of 2% to 4% of the transaction. Cash advances refer to ATM withdrawals, gambling transactions, some bill payments, money transfers and other cash equivalent transactions including buying traveller’s cheques, foreign currencies, gift cards or prepaid cards. See our guide on what is considered a cash advance for more information.

While it’s best to avoid cash advances on your credit card altogether because there aren’t any Australian credit cards that have 0% interest on cash advances, there are some that charge a lower interest rate on them. In the event that you have to use a cash advance for an emergency, make sure to pay it off as soon as you can. Otherwise, it’s wise to keep your debit card for cash advance transactions like ATM withdrawals and bill payments if you want to avoid interest.

The benefits of avoiding credit card interest

Not that this needs much selling, but to reiterate, avoiding interest helps to:

• Save money on interest costs. Money otherwise lost to interest can now be channelled toward repaying your debt, or better yet, toward savings or personal treats if you’re debt-free.
• Reduce debt. Compounding interest is the reason that people struggle to extricate themselves from the “debt trap”. Reducing your interest costs can substantially help reduce debt and hasten your journey to debt freedom.

• Improve your credit file. Another indirect benefit of interest savings is being able to repay your balance faster. This is reflected on your credit file and will improve your credit score.

As long as you’re able to sidestep the interest fees, credit cards can remain a cost-effective way to manage your cash flow. Follow the above steps and make sure you regularly check your account statement to keep track of your interest charges and determine the best way to keep your credit card costs low.