Credit cards and interest go hand in hand. If used unwisely, they can cause a debt spiral fuelled by mounting interest. But if used correctly, they can be a useful and inexpensive financial tool. And believe it or not, there is a way to have a credit card and never have to pay any interest. So let’s take a look at how to avoid paying interest on your credit card debt.
Every credit card has an interest rate. In fact, it will have several different interest rates. Different rates are charged for different transactions.
Typically, a credit card has a purchase rate, a cash advance rate, a balance transfer rate and a money transfer rate.
You will be able to find out what these rates are for your chosen card in its ‘summary box’. This is typically on the card’s webpage near where you click to apply for the card.
If you buy something with your credit card, and don’t pay the balance in full each month, then you will be charged the purchase rate of interest on the outstanding debt.
If you withdraw cash using your credit card, you will be charged the cash advance rate. This tends to be high on most credit cards and it’s charged from the moment you make the withdrawal. So it’s best to try to avoid using this facility. If possible, use a debit card instead.
Balance transfers and money transfers are not offered on all credit cards. So check if yours has those features. It if does, then the balance transfer rate and money transfer rate is the interest you will be charged on anything you have transferred and not paid off.
If you are comparing cards, then you are most likely to see ‘APR’ used as the credit card’s rate. APR stands for ‘annual percentage rate’ and it’s there to show an annual cost of credit, including interest and other charges.
If you use your credit card wisely, it’s possible to avoid paying interest charges altogether. Or it’s at least possible to keep interest down to a minimum. Here’s what you can do.
The easiest way to avoid any interest charges is to pay your balance off in full each month. It is only outstanding balances that are charged interest.
For most credit cards, you will have an interest-free period of 56 days for purchases if you pay your balance in full and on time. However, the easiest way to ensure that nothing slips through is to set up a direct debit to pay your statement balance in full each month.
If this is not possible, try to pay off as much as you can. It is important to pay at least the minimum monthly repayment on time, otherwise you could damage your credit score.
If you use your card to make a cash withdrawal, it is best to pay this off instantly. Unlike purchases – which give you a little bit of breathing room – the interest on cash advances is charged from the moment you make the withdrawal.
You may have a credit limit of thousands. But that is a limit, not a target. The best way to avoid paying interest on a credit card is to only spend what you can afford to pay back.
There are many reasons for having a credit card. For example, you could be trying to build your credit rating, or aiming to accrue reward points on your spending. If you only spend what you can afford to pay back, then you can achieve those goals without incurring any interest charges.
If you know that you have a big purchase to make that you want to pay off over a period of time, then maybe consider a 0% purchases credit card. This will give you a period of time where any purchases you make on your card are interest-free.
However, to avoid paying any interest at all, you’ll need to make sure you pay off the full balance before the interest-free period ends. After it ends, the card will revert to its purchase rate of interest on any outstanding debt.
It is always a good idea to compare financial products before applying. Sites like MyWalletHero can show you some of the most competitive deals around.
When selecting a card, it is also important to look at the cost of borrowing. You may have every intention of avoiding interest charges altogether, but if for some reason you don’t manage this, you’ll want to have the lowest APR you can find.
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