How To Avoid Interest on Credit Card

Credit cards are easy to use and fun to have – as long as bills are handled responsibly.

Those who do not handle credit card debt properly face the daunting challenge of paying significant extra costs from credit card interest.

It’s not an uncommon problem. A 2023 study by Ramsey Solutions found that 42% of Americans consider themselves OK, fair, or poor when it comes to handling credit card debt.

Almost half of credit card users – 47% — don’t even know the interest rate charged on their cards.

That kind of near-willful dismissal of reality is part of what leads to onerous and painful credit card debt, compounded by the interest charged.

Banks and companies do not offer credit cards as a public service. They make money by charging interest on any unpaid balance on our credit card bills. And the average interest rate is 22.76%, according to the Federal Reserve.

By paying interest, you are giving the banks and credit card companies free money. Even though they will say it’s the cost of using a credit card, it’s a cost that can be avoided.

There are ways to avoid paying interest on your credit card, and the best way is by paying the balance each month when it’s due.

Not all of us have the means to accomplish that goal, so there are other ways we will look at to avoid credit card interest, or at least minimize it.

How Does Credit Card Interest Work?

When you charge the cost of an item – say you need a new TV or repair on the car — the credit card company pays the bill and you agree to pay that money back by a specified date.

Some people pay the entire amount due immediately, which is the best way to handle an expense (if you have the funds). Others may pay a portion of the bill, say $200 of an $800 bill.

That leaves a balance of $600. So, the next bill will include the unpaid $600, the accrued interest on the account, and any new charges placed on the card.

Suddenly that $600 bill has increased.

The interest charged is based on the annual percentage rate (APR) the credit card charges. The APR is based on the annual cost of borrowing. A monthly APR would be calculated this way: $600 on the remaining balance x 22.76% (the average credit card interest rate) = $136.56. Divide that by 12 months (remember this is a monthly charge) = $11.38.

In our example this might not seem like a lot. But if that balance is carried over a year, that TV suddenly would cost $136 more than originally charged. And, with more than $1 trillion in credit card debt nationally, many people carry a much higher balance.

The average credit card balance is $6,501. Apply the same calculations to $6,501 and that debt would increase by $123 per month, or $1,479 per year.

Then consider that paying just a little more than the interest charge — $128.71 per month – means it would take 10 years to pay off the entire debt and you’d pay more than $7,800 in interest alone, assuming nothing else is charged on the card, of course.

Given that interest on credit card debt is compounded daily repaying the debt is a process that could take several years.

Needless to say, it’s a financial position best avoided.

Strategies to Avoid Paying Interest

Strategies to avoid paying credit card interest are not all simple or easy, but they are there for the taking.

Some involve basic responsibility, which is the best approach to credit card debt.

However, there are times when an unexpected expense – car repair, medical bill, etc. — means we can’t pay the amount due immediately. Even then, there are strategies that can help avoid interest charges.

Knowledge is power in this situation. Knowing what to do and what approaches to take can save you money, which is the goal for all of us.

Let’s take a look.

Paying the Full Balance

Paying the balance when due each month is far and away the best approach to avoiding credit card interest. If you pay the balance due each month by the due date, you won’t be charged interest.

A common misconception is that carrying a credit card balance helps a credit score. This is not true. Consistently paying a credit card bill in full and on time will help the credit score. But if no payment is made, the credit card company will report you to the credit reporting agencies, and that will negatively affect your credit score.

In addition, carrying a balance affects your credit utilization rate, and can negatively affect your credit score.

The best approach to avoid interest is to pay the balance in full. And if you can’t (sometimes for good reasons), the next best approach is to pay as much of the balance as you can, on time.

Introductory 0% APR Offers

There are times when a credit card company will offer a new card with an introductory 0% interest. For those carrying a card balance, this can be a good option for eliminating credit card debt without paying any interest.

But it comes with a caveat – you must pay the balance due before the “introductory period,” expires.

Typically, 0% balance transfers give you 12-18 months to eliminate the debt transferred. As we’ve seen, this can provide substantial interest savings. The process involves being approved for the new card, transferring the balance, and then paying the required amount each month so that you pay off entire debt in the time you have 0% interest.

These offers require an excellent credit score – sometimes 690 or higher. And they generally charge a transfer fee of between 3%-5% of the balance. The fee is not insignificant, but when compared to the overall savings offered by 0% interest, it’s usually worth the cost.

It’s important to be aware of the date when the 0% offer on the balance transfer ends because when it does, the interest charges will increase to “normal” on the remaining amount due. Thus, the importance of paying the entire amount by the number of months offered – be it 12, 18 or 24.

Using Grace Periods

One benefit offered by credit cards is the grace period. This means there is a time period when the bill is not due, and by law must be at least 21 days.

The 21 days start on the day the bill is generated, and end on the due date printed on the bill you receive in the mail or electronically.

Let’s say you charge something with a credit card on the 1st of a month. The bill is generated on the 5^th. You then have at least 21 days, or until the 26^th, to pay the entire bill.

Focusing on the grace period may help some, but focusing simply on the bill’s due date is most important. A regular payment could be set up electronically that would pay the entire bill on the due date or the day before via electronic transfers from your bank account.

The good news about making payment by the due date means the grace period is in effect for the next billing cycle. Not paying the entire bill may well mean you will be charged interest on an item as soon as the purchase is completed.

Paying in full and on time maximizes the use of the grace period.

Options to Reduce Credit Card Interest

There are approaches that can effectively reduce the total amount paid in credit card interest charges. They might not reduce the actual rate, but they will reduce the total paid in interest. Among them are:

• Debt avalanche: This involves listing all debts in order from highest to lowest interest rate. Make the minimum payment on every debt, but add whatever is left in the budget to the debt with the highest interest rate. Once that is paid, move to the card with the next highest interest rate.
• Make several credit card payments each month: There’s no need to wait and make one payment on a credit card. Making two or three or even four payments each month can reduce interest slightly. That’s because interest is charged on the remaining balance, and each payment chips away at that balance.
• Avoid a cash advance: Taking a cash advance on a credit card is tempting, until you look at the details. These “loans” come with high fees and interest rates and are best avoided for better solutions.
• Rely on savings to pay down debt: A savings account may (emphasis on may) pay 4% each month. That’s far less than the interest you pay on a credit card balance. The savings are there for a reason. Use it to pay down debt. It will keep the financial house in better order.
• Consider a personal loan: Taking out a personal loan and using that money to pay off debt could provide a lower interest rate, and a lower monthly payment to one creditor. It simplifies the process, but it’s wise to be careful about all costs, fees, and the interest rates of these loans.
• Talk to a nonprofit credit counselor: He or she will assess your financial situation carefully and may offer a solution that could involve a debt management plan. You’ll have to live up to the terms of the plan you and the counselor choose, but the right plan could cut interest costs significantly.

One other option: Give the credit card company a call to see if the interest rate can be reduced.

Negotiating Lower APR

Calling and asking for a reduced interest rate may sound challenging, but credit card companies do not want to see an account go into default. They’d rather receive some repayment as opposed to none, which could happen in default.

What are the best ways to negotiate with a credit card company?

• Ask for the debt settlement department: This gets you past the people who are not hired to handle these situations and to a person who may be able to help.
• Be honest. Explain your situation clearly and truthfully.
• Be kind: The axiom “you get more with honey than vinegar” applies.
• Don’t be afraid: Financial problems may not be your fault. Explain clearly why the situation has become difficult.
• Offer a suggestion: Explain in detail why paying two-thirds (an example) of what is owed is more realistic for your financial situation.
• Prove you are trustworthy by paying other bills on time.
• Confirm what is owed before hanging up.

This likely will not be solved with one phone call. It may take several. Keep a record of the date and time of each call, and what was discussed. If and when a card company agrees to a solution, be sure to get it in writing.

What plans might a credit card company agree to?

• A workout agreement: These usually happen when an account reaches default. In a workout agreement, you “work out” a way to repay some of the debt with either a reduced interest rate, and/or the cancellation of some fees. You basically agree to pay what is worked out, but it must be paid on time and in full, or the credit card company will return to the original interest rate and penalty fees.
• A hardship plan: Anyone who experiences financial hardship or challenges due to medical bills, lost job, or other significant issues, can apply for this plan. Card companies can work out a solution while recognizing the hardship faced.
• Lump-sum payment: Offering to settle the remaining debt for one lump sum will reduce the total amount owed and eliminate the debt, if approved. However, it means having the funds to make that payment, and proving that to the card company. A credit card company may accept this solution because it means they will get something for the debt as opposed to risk getting nothing, or close to nothing.

Debt Consolidation Programs

As we already mentioned, a discussion with a nonprofit credit counselor about your finances and debt could lead to a solution through one of many debt consolidation programs. These include:

• Debt management: Nonprofit agencies have agreements with credit card companies to lower interest rates and monthly payments to an affordable level so the debt can be paid off in 3-5 years. Typically, the interest rate can be lowered to 7%-9% (sometimes even lower), which is less than half the average rate of 22.76%. Debt management will lower credit scores for a few months and ask you to retire credit cards. But if you make payments in full and on time, the credit score should bounce back.
• Debt consolidation: For those with a good credit score (typically above 680), qualifying for a debt consolidation loan can be a solution. Debt consolidation involves combining two or more debts into one loan, hopefully at a lower interest rate, which leads to one payment to the bank, credit union or online lender. In 2024, optimal interest rates for these loans started at around 7% for those with excellent credit. A debt consolidation loan does not address the spending habits that got you into debt in the first place. Also, the hard inquiry involved with the loan will cause a drop in your credit score, but again, on-time payments will improve the score over time.
• Credit card debt forgiveness: This happens when a nonprofit credit counseling agency has an agreement with one of the card companies to reduce the amount owed by 40%-50%. The amount must be paid in monthly installments over three years. A credit card debt forgiveness program is offered by a limited number of nonprofit credit counseling agencies and accepted by a limited number of creditors. The credit score will take a hit, but if you make on-time payments, it will recover.
• Debt settlement: This involves paying less than what is owed on a credit card debt. You make payments to an escrow account while a for-profit settlement company negotiates with the card company or collection agency to reduce the amount owed. Debt settlement normally takes 2-3 years for your contributions to be substantial enough to make an offer to the creditor which typically is around 50% of what is owed. The downside is that the balance keeps growing during that 2-3 year contribution period because of late fee penalties and interest charges. Also, debt settlement is a negative on your credit report for seven years and can cause your credit score to drop by 100 points or more.

Managing Existing Debt

We’ve already gone over how the avalanche method of reducing debt works. That approach means paying off the loan with the highest interest rate first.

A similar option to reduce credit card debt is the snowball method. This means paying off the smallest loan (based on the amount due, not the interest rate) as soon as possible. Once that debt is paid, take the money you were using for the first loan and apply it to the second-largest loan and continue until all debts are paid. As you do this, the amount used to pay the loans snowballs, or increases.

The avalanche method will save more money but may take longer to pay. The snowball method may provide a little momentum as you see loans being paid.

Both require a similar approach:

• Make a list of loans: And include interest rates.
• Sort through the loans: For the snowball, list loans from the lowest amount owed to highest. For avalanche, list from highest interest rate to lowest.
• Budget more than the minimum due to pay off the loans: The goal is to eliminate them. Budget as much as you can afford.
• When one loan is paid off, apply those payments to the next: This helps pay the next loan faster.

Budgeting and Financial Planning

We’ve said it more than once: The best way to avoid credit card interest is to not charge more than you can afford to pay at the end of the month. And if an emergency expense arises, budget so the entire balance is paid as quickly as possible.

The importance of a budget can’t be stressed enough. Knowing what money is coming in and what money is going out is vital to sound financial footing.

Credit cards can be a boon to our financial approach. They are easy, some offer perks, and if paid off in full and on time are like briefly using someone else’s money for free.

However, credit card debts can quickly grow out of control if not addressed. Interest rates of 20% or more lead to debt growing into sometimes unmanageable ways.

It’s important to keep up with credit card accounts and to take action if they are growing beyond your means. A nonprofit credit counselor can be a great sounding board and help you take steps toward financial stability.

While none of us like debt, you owe it to yourself (see what we did there?) to manage credit card debt appropriately and responsibly. Whether it’s through 0% offers, negotiating a lower APR, finding a debt consolidation program, or better managing the debt, there are strategies that can help avoid credit card interest.