Strategies to avoid and minimize credit card interest

Paying interest is never pleasant, but we all particularly aim to steer clear of credit card interest. That’s why our top rule for credit cards at TPG is to settle your balance in full each month—carrying a balance leads to interest charges that can overshadow any rewards from your initial purchases.

Here are some effective methods to prevent and lessen credit card interest.

Understanding the impact of interest charges

The rapid accumulation of credit card interest is what makes it so exasperating.

With a credit card balance of $100 and a 20% annual percentage rate (APR), you'll incur 5 cents in interest on the first day. The following day, your interest will be calculated on the new total of $100.05, resulting in an interest charge of about 6 cents for day two.

By the end of the month, you could rack up nearly $2 in interest, surpassing the $1.50 earned in rewards from a cash-back card that offers 1.5% on that $100 purchase.

While it might not seem substantial, if your initial balance were $1,000, you'd incur around $17 in interest after a month. With a starting balance of $10,000, that interest jumps to nearly $170. This interest compounds quickly, making it crucial to minimize it whenever possible.

Tips for avoiding credit card interest

Pay off your credit card bill in full

The easiest way to prevent interest from piling up on your credit card is to pay your bill in full each month. This allows you to enjoy rewards without the stress of accruing interest on any outstanding balance.

Utilize the grace period

Under the Credit CARD Act of 2009, you must receive your credit card statement at least 21 days before your payment is due, and most cards won't charge interest during this time.

If you need a bit more time to clear your balance, you can often wait until the end of this grace period to pay before interest begins to accrue. If you make a purchase early in your billing cycle, this can provide you with nearly two months to settle the payment.

Keep in mind that not all credit cards offer a grace period, so it's important to monitor your billing cycle, payment deadlines, and the fine print in your card's terms and conditions to verify that yours does.

Consolidate your debts

If you carry balances on several credit cards, it may be beneficial to pay a balance transfer fee to shift all your debts to the card with the lowest interest rate, helping to reduce your interest charges.

Consider using a 0% APR credit card

Some credit cards provide an introductory 0% APR for a limited time after account opening. If you have a significant purchase that you'll need time to pay off, getting one of these cards and using it for your purchase is an excellent way to avoid interest charges.

Additionally, you can transfer your balance from another card to one with a 0% introductory APR, allowing you to pay off your balance without accumulating further interest. While most cards do charge a balance transfer fee, this fee is typically much lower than the interest rate on your existing card, making it a worthwhile investment for long-term savings.

Ways to lower credit card interest

Implement a debt repayment strategy

If you find yourself in credit card debt, focusing on reducing your card balance is the most effective method for decreasing interest. While this can be challenging, there are various strategies you can adopt to help pay it down.

Two of the most popular strategies for repaying debt are the snowball and avalanche methods. The snowball method prioritizes paying off your smallest debt first, while the avalanche method focuses on eliminating the debt with the highest interest rate first. There’s no definitive right or wrong approach, so select the method that feels most manageable for you.

Make multiple payments on your credit cards each month

Since interest accumulates daily after your grace period ends, making credit card payments multiple times a month can help lower your interest costs. Even if you can't pay off the entire balance, contributing what you can whenever possible will result in less interest compared to letting it accumulate all month and making just one payment when the bill is due.

Use your savings to reduce debt

Typically, the interest earned on your savings account is significantly lower than the interest accrued on a credit card balance. For example, the average interest rate for a high-yield savings account is about 4%, whereas the average credit card APR exceeds 20%.

If you have funds in your savings account that you can use to reduce your credit card balance, you’ll save more by paying off your debt and avoiding additional interest than you would earn by keeping the money in your savings.

Key takeaway

The most straightforward way to avoid credit card interest is to pay off your balance in full each month. Additionally, you can take advantage of your card’s grace period or opt for a credit card with a 0% introductory APR to avoid interest on purchases for a limited time.

Even if you're unable to completely clear your credit card balance right now, implementing a plan to reduce it can lead to significant savings in interest down the line.