How to not pay interest on a credit card
Whether you’re making purchases or paying off a debt, here are 5 tips to keep your credit card interest costs low.
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If you don't pay your credit card balance in full by the statement due date, it will attract interest charges. The more interest you collect, the more difficult it can be to repay your balance. To help keep your credit card costs low and your debt under control, here are five tips you can use to avoid credit card interest.
1. Look at 0% purchase credit card offers
A credit card with an introductory 0% interest rate on purchases gives you a way to repay your purchases without interest charges during the introductory period, which typically ranges from 3 to 15 months. At the end of this period, the standard interest rate applies to any remaining balance, as well as any new purchases. This means you need to repay your entire balance before the end of the introductory period if you want to completely avoid interest.
So, if you have specific purchases in mind or know you will be spending a lot in a short period of time, you could consider getting a card that offers an introductory 0% interest rate on purchases. Just be aware that you will still need to pay at least the minimum amount each month, even during the interest-free period. And if you want to pay off the entire debt before the end of the introductory period, you could also use a credit card calculator to work out the ideal monthly repayment amount.
2. Maximise your interest-free days
Many credit cards offer up to a set number of interest-free days on purchases for each statement period. This gives you a window of time when you can make payments while avoiding interest charges on the balance.
But there are two important things you need to know if you want to take advantage of interest-free days:
- Your repayment history matters. Most credit cards that offer interest-free days only do so when you have paid your account balance in full for the previous 1-2 statement periods. So if you have carried a balance from month to month, you may not be eligible for any interest-free days.
- How the interest-free period is calculated. Cards that offer this feature will say you get "up to" a certain number of interest-free days in each statement period. This is because the interest-free days start on the first day of your statement or billing cycle and end on the statement due date. So if you had a card that offered up to 55 days interest-free and made a purchase on the first day of your billing cycle, you would get 55 days interest free. But if you made a purchase on day 10 of that cycle, it would only be interest-free for 45 days. See Finder's guide to how interest-free days work for more information.
3. Repay your balance before the statement due date
If you want to cash in on interest-free days, you will usually need to pay your entire balance before the statement due date. But even if you're not eligible for an interest-free period, making your repayments on time can help you reduce the amount of interest that you pay.
If you struggle to repay your balance on time, there are a few things you can do to get back on track. It could be as easy as setting up reminders in your calendar or smartphone. Or you could set up automatic repayments from your bank account to your credit card each month. If you find that you don't have enough money to repay your full balance each month, you could ask your card provider to move your statement due date so that it’s closer to your payday. This might help you manage cash flow so that you have enough funds to repay your balance and avoid interest.
4. Consider a 0% balance transfer credit card
If you’re struggling to repay an existing debt, you could consider a 0% balance transfer credit card. A balance transfer involves moving one debt to another card with an introductory 0% interest rate. This means you can repay your debt without paying any 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 significant 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 spending 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 purchase.
5. Avoid cash advances
Using your card to make a cash advance can attract high interest costs. Depending on the card, the cash advance interest rate can range between 20% and 22%. You'll also be charged a cash advance fee of 2% to 4% of the transaction amount. Unlike purchases, the cash advance interest rate will apply from the time the transaction is made.
Cash advance transactions include 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. You can see Finder's guide to what is considered a cash advance for more examples.
There aren’t any Australian credit cards that charge no interest for cash advances, so it's ideal to avoid making these transactions. While, there are some that allow you to make cash advances with a lower interest rate, the costs could still add up very quickly. If you have to get a cash advance for an emergency, try to pay it off as soon as you can. Otherwise, it’s wise to keep your debit card for transactions like ATM withdrawals if you want to avoid interest.
All credit cards charge interest, but these are some of the strategies you can use to keep your card costs low.
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