Do you know you can avoid paying interest charge on your credit cards? Perhaps you have read about how to lower the interest that you pay on your credit card. That is fine! Paying low interest will definitely save you some costs. However, you may not yet know how you can lower the interest you pay on your credit cards. One of the popular ways of reducing the interest charged on your credit card is by shopping for low apr credit cards. Why low apr credit cards? The higher the card apr, the higher the interest amount you will pay on the card balance and vice versa.
For example, if you have a balance of $5,000 on a credit card with 25% apr, you may need to pay the interest amount around $104.17 in a month. But if you have a card that only charges you 10% apr, the interest payment on the same amount of $5,000 for the month will just be $41.67. To some, the difference may not seem significant. But by the time you multiply this by twelve months, you may likely see that lower apr can make a big difference on the interest amount. However, the only problem with shopping for credit cards with low apr is that, such cards may not be available to everybody. Low apr cards are usually available to people with very good or excellent credit score. If your credit score is not good enough, it may be difficult for you to get a credit card company that will offer you low interest rate. Credit card companies use your credit score to measure your credit worthiness. People with excellent credit score are perceived to be credit worthy. That is, credit card companies believe that they are most likely to pay their card balance without any default. Therefore, such people are rewarded with low interest rates. On the other hand, if your credit score is just average, you may be considered as somebody who may likely default in your payments. This is a risk on the part of the credit card companies. That is why credit card companies may likely charge you high interest rate in order to cater for the additional risk they may need to carry.
Another factor you may need to consider why shopping for low apr credit cards is that, some of them may come with other charges such as annual fee. So, while you are paying low interest on your card balance, the annual fee you may need to pay on the card may wipe away whatever savings you thought you have made on the interest payment. So, instead of shopping for low apr cards, I would rather try to avoid paying interest completely. So, how can you avoid paying interest on your credit cards? It is very simple. That is what I will be discussing with you below.
How to avoid paying interest charge on credit card
The simple way to avoid paying interest on your credit cards is to avoid carrying balance on your cards. People think that payment of interest is automatic as long as you hold a credit card. No! It is not compulsory that you must pay interest on your credit cards. Credit card companies will only charge you interest whenever you fail to pay off your card balance at the end of the month. Whenever you use your credit card to make purchase, you are actually borrowing money from your card issuer. They are lending you the money in trust with the expectation that you will pay off the amount at the end of the month. But when you now fail to pay off the amount you spent with the card at the end of the billing cycle, they will charge you interest based on the card balance and the applicable apr. But if you pay off the card balance before the end of the month or the grace period, you will not need to pay any interest at all. You will just be using their money for free. If you know that you will be able to pay off your card balances at the end of the month, then there is no reason for you to be afraid of whether the apr on a card is low or high.
How can you ensure that you don’t carry balance on your cards so that you can avoid paying interest? This is very simple. You can try the following:
Limit your card spending: One of the problems with credit cards is its convenience. It makes spending very convenient. Because of this, some people find it difficult to discipline themselves when it comes to shopping. They even buy at impulse. If you are this kind of person, credit cards may not be good for you. If you still believe that you need a credit card, you may avoid carrying it with you all the time. Don’t use the card to make large purchase or what you will find difficult to pay at the end of the month.
Don’t withdraw cash with your card: Credit card companies treat cash withdrawal differently. They don’t wait till the end of the month before they start charging interest on the amount withdrawn. The interest charge commences immediately. Besides, you will still need to pay cash advance fee which is about 5% of the amount withdrawn. Some credit card companies has minimum amount of cash advance fee they charge. In most cases, it is about $10. What this means is that, if the 5% of the amount you withdraw is less than $10, you will be asked to pay $10. For example, if you withdraw $100, the 5% will be $5. Since this amount is less than $10, you will not be charged $5 but $10. This means that you are paying as much as 10% as cash advance fee. Except you pay off the cash advance immediately, you will still need to pay interest on the amount withdrawn. So, if your objective is to avoid paying interest on your credit cards, you should desist from using the cards to withdraw cash.
Pay twice: Do you know you don’t need to wait till the end of the month before you pay your card balance? You can actually pay twice in a month. By the time you see what is left in your account after making the first payment, this may serve as a check on your spending.
Know your billing cycle: The reason why some people end up paying interest on their credit cards is that they don’t pay their balances on time. It is not that they don’t have money to pay the balance. Your billing cycle may not be actually the end of the month. So, if you wait till the end of the month before you make payment, your card issuer may have charged you interest already. If you don’t know your billing cycle, it is better you ask your card provider. It is not enough to pay off your card balance; you have to pay it on time.
Apply for Balance Transfer Credit Card: Balance Transfer Credit Card will only be useful to you if you are already paying too much interest on your card balance. It is possible that you realise that the apr on your existing credit card is too high thereby making you to pay huge interest amount through your nose at the end of every month. If this is the case, shopping for balance transfer credit card that will not charge you interest on the balance you are transferring for a considerable length of time may help you avoid paying interest as long the zero apr introductory period lasts. However, you should understand that you may need to pay transfer fee which is about 3% on the amount you are transferring. Balance transfer credit card is only useful if it will help you save some costs and you are sure that you will be able to pay off the card balance within the 0 apr introductory period. Otherwise, you may end up paying more interest as the apr after the 0 apr introductory period is usually very high. Also, 0 apr introductory period may not apply to fresh purchase.
Paying off your card balances is not only cost saving; it helps you boost your credit rating. Your payment history is one of the criteria the credit bureau agencies use in calculating your credit score. People with history of defaults in payment may have their credit score adversely affected. In fact, defaults can stay up to six years on your credit reports. However, its effects start dwindling with time if you are able to clear the defaults and continue to pay your balance promptly. Instead of allowing your account to go into default, it is actually better to ensure that you make minimum payment on the account. Please note that if you make just minimum payment, you will be charged interest on the remaining balance.