Avoiding credit card interest

Information verified correct on January 21st, 2017

If there’s a person on the planet who wants to pay credit card interest we haven’t found them yet. Credit card interest can turn a quick couple of purchases into a debt demon which may feel like it’s impossible to break free from, but it can be avoided. If you take the time to learn the basics behind how the different aspects of your credit card works you could be free of credit card interest.

Understand special rates

Many Australians are drawn to new credit cards because of the introductory specials offered. These can include interest free periods and balance transfer offers. These rates have a beginning and an end so it’s important to know when they change because your rate can increase. Some think that if they have a rate that has a good introductory purchase rate they’ll have this rate until their balance is paid off. Just because the purchase was made during the special rate period doesn’t mean you’re granted that special rate until the balance is paid. Once that period ends, your rate will go up to the purchase rate or whichever rate is stated on your agreement.

Use interest-free days to your advantage

Most credit cards provide 44 to 55 days of no interest when you make a purchase. However, this depends on when you made the purchase. It also depends on whether or not you pay your balance off in full each month. If you don’t then it might not be possible to use the benefit of the interest-free period. The lesson here is to read the terms and conditions before applying for any card, and call the provider if you find anything you don’t understand.

Make purchases wisely

However, interest free terms don’t apply to every purchase you make on your card. For example, if you’ve transferred a balance onto your card but haven’t paid off the entire amount at the moment then any purchases you make while that balance still exists will be subject to interest charges.

It’s also important to know what rates your balance transfer will revert to once the offer expires. You don’t want the surprise of being slugged with the cash advance rate on any remaining balances you fail to pay off.

How the interest free period works

Watch Finder.com.au Director Fred Schebesta explain how interest free days work

Save cash advances for emergencies

Cash advances are charged at one of the highest interest rates on your credit card, and the interest is applied to any cash advances straight away. You don’t receive any interest-free days when you take out cash advances. In addition to the interest that is charged immediately, you’re also charged a fee just for the cash advance. Knowing all of this, it’s wise to save cash advances for times of emergencies or crises. If you are unsure about what constitutes a cash advance, here is a list:

  • Taking money out on your card at the ATM or at a counter;
  • Transferring money from your credit card over to another card or account using online banking, ATM or over the phone;
  • Paying your bills over the counter with your credit card;
  • Paying for traveller’s cheques with your card, gift card or other types of purchases that might otherwise be purchased with cash;
  • Gambling using your credit card.

It’s in your best interest to pay off these balances as soon as possible. Otherwise, your balances will increase exponentially, making it much harder to pay off.

Timely payments are always best

If you want to get the bang for your buck you should pay your bills on time and in full if possible. This means that you will avoid unnecessary interest charges.

If you do this then there will be no confusion and no ‘surprise’ interest charges when you receive your next statement.

Set up direct debit and save time and headaches

If you set up a direct-debit from a nominated account then you won’t have to worry about paying your bills on time because they’ll be done for you! You establish the amount that you want debited and it will be taken care of. It’s less for you to worry about and you’ll save money on interest and late fees as well.

In fact, you can even set it up to make exact balance payments. For example, if you owe $400, you can have it arranged to pay exactly $400. Also, be aware that the payment will not be shown on your balance until the following business day. A full business day is necessary to be certain that there are adequate funds in your account to process the transaction.

Helpful reminders at your request

Let’s face it, we’re all busy. Sometimes it’s helpful to get a little nudge and be reminded about something. You can do that with some of the major banks out there. It’s no fun to be hit with late fees or be charged interest just for having a bill slip your mind. Some banks will even send you a free SMS to remind you it’s time to make a payment, or send you an email.

You can also have it set up to send you updates on your balance so you can keep an eye on your spending habits.

Set up repeat payments

You can also use your online banking to carry out periodic transfers. If you transfer funds over to your credit card you can set it up to do this on a regular basis every month.

This still requires you to keep track of your account. If you want to keep your balance clear and free, you are responsible for paying the entire amount which isn’t always possible if you set the same repeated periodic transfer amount. For example, if you owe $440 but you have your transfer set up for $400 then you will need to go in and cover the other $40 to make sure you are covered.

Conversely, if you pay too much it will be adjusted as credit on your next statement.

Making payments is easy

It’s possible to make a payment on your credit card at any time. You don’t have to wait for your bill in order to make a payment. For example, if you have taken out a cash advance, it’s in your best interest to pay it off as soon as possible because you will end up paying much more than you may have intended.

Customise your payment date

Sometimes you need to tailor your payment date to make it suit you. If your payment date falls on a time of the month that is less than ideal for you, all you need to do is call and see if your lender will change it to a date that works better for you. It’s as simple as that.

Credit card interest doesn’t have to be feared. Get familiar with how your credit card works and avoid having to pay off a huge interest bill.

Marc Terrano

A passionate publisher who loves to tell a story. Learning and teaching personal finance is his main lot at finder.com.au. Talk to him to find out more about home loans.

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