How to Avoid Interest on Credit Card Purchases, Balance Transfers, and Cash Advances

Credit cards are a fast and simple way to purchase goods. But this convenience comes at a price: interest fees.

If you don’t pay your balance in full by the end of each month, the issuer will charge you interest on the outstanding balance.

But how much will you pay?

And how to avoid interest on your credit card altogether?

Below, we show you how to calculate how much your credit card will cost you and how to pay less or nothing.

Here’s a peek into some of our tips:

• Understand how credit card interest works
• Pay your balance in full each month
• Read the fine print
• Sign up for automatic payments
• Find a 0% introductory APR card

Read on for more.

What Is Credit Card Interest?

Before we go into more detail about how to avoid paying interest on your credit card, let’s see how it works.

Credit card interest is the amount that the issuer charges the customer for borrowing money.

It is usually expressed as a yearly rate, or annual percentage rate (APR). That said, the charges are typically calculated and paid per billing cycle.

The APR includes the interest rate and the credit card company fees.

How much and when you need to pay depends not only on your credit history and type of card, but on the type of interest rate, too.

There are a few ways in which you can classify it. 

Variable vs. Fixed APR

To understand how credit card interest is calculated, you need to know whether it’s fixed or variable first.

The variable APR can change over time. This is because it is tied to a financial index, such as the prime rate. A fixed APR, on the other hand, will not change for the life of the debt.

Which one is higher depends on the current prime rate.

So, if the interest rate market is declining, a variable rate is the better option. If the rate is low but the market is expected to start growing, you should choose a fixed rate.

Another benefit of fixed rates is that they are more predictable. It might be easier to calculate and manage your payments.

Deferred vs. Standard Interest

Standard interest is the interest charge on purchases. It applies if you don’t pay off your balance within the grace period.

This is the time between the last day of your billing cycle and the due date. Typically, it is 21 days.

With deferred interest, you start paying interest charges after a longer promotional period.

If you don’t repay the full balance before the due date, the issuer will charge you interest on the remaining amount.

It’s the same principle as with standard interest, but you have more time to pay back the money.

The catch is that you won't just have to pay interest on the delay after the end of the period. The issuer usually calculates how much has accumulated since the date of the purchase.

So, how to avoid interest on your credit card?

In each type, the best way is to pay the full balance before the grace or promotional period expires.

Types of APR

There are a few more types of APR we haven’t discussed yet. These include the purchase interest charge, cash advance, and penalty APR.

The purchase APR is the interest on things you’ve paid for with your credit card. It applies if you don't pay off the full balance during the grace period.

The cash advance APR is the interest rate on cash advances taken from your credit card. There's no grace period for this APR. Charges start applying immediately.

The penalty APR is the interest you pay if you miss or are late with a payment.

There might be other charges the credit card company applies. To avoid surprises, read the fine print.

How Does Credit Card Interest Work

Here’s our first tip on how to avoid paying interest on your credit card:

You need to understand how it works.

If you know what, when, and why you owe, it’ll be harder to mess it up.

Credit card companies calculate interest in various ways. 

Some use the daily average balance, others—the unpaid amount at the end of each billing cycle. Yet others use a two-cycle average daily balance.

You can find out which method your issuer uses in your cardholder agreement. But the basic principle is the same with all:

Multiply the balance by the daily interest by the number of days you’re late with the payment.

Let’s see how to calculate credit card interest using the daily average balance method.

How to Calculate Credit Card Interest

To get your daily interest rate, you need to divide the annual percentage rate by 365 days. Some card issuers use 360 days, so check your credit card terms carefully.

The number you get is called a daily periodic rate (DPR).

DPR = APR / 365

If your APR is 20%, the DPR will be 20% / 365 = 0.054%.

The next thing you need to calculate the interest charge on your credit card is the average daily balance of your account.

Here’s how to do it:

First, check the number of days in your billing cycle. You can find this information on your statement or in the cardholder agreement.

Next, add up your balance for each day of the billing period (including the unpaid balance from previous months). Finally, divide the sum by the number of days.

So, to find the interest you owe on your credit card, use the following formula:

average daily balance x number of days in the billing cycle x DPR

If the billing period is 30 days, your average balance is $100, and the DPR is 0.054%, you'll get the following:

$100 x 30 days x 0.054% = $1.62

This means you owe the credit card company $101.62 (outstanding balance plus interest).

For each day you don’t pay, more interest accumulates.

So, let’s see how to lower it or, better yet, how to use a credit card without paying interest.

Avoiding Interest on Regular Purchases

When you use a credit card to make regular purchases, you can avoid accruing interest charges by following a few simple steps.

Pay Off the Full Balance During the Grace Period

To avoid interest on your regular purchases, you need to pay off everything you owe within the grace period.

Most credit cards give you between 20 and 25 days before they start charging. Check with your issuer what your grace period is.

If you can't repay the full amount, try to at least make a significant dent in the balance. This will reduce the amount subject to interest charges.

That’s the only 100% certain way to avoid credit card interest.

Make Payments Several Times a Month

Making payments on your card several times a month will make the amount more manageable. You might find it easier to budget for it this way.

If you still can’t repay the full amount, at least you’ll lower the interest charges.

Why?

As we explain above, the issuer uses your average daily balance to calculate the amount you owe. In turn, the average depends on the daily balance in your account.

By paying more than once, you're lowering your daily balance and, as a result, the monthly average.

That said, the best way to use a credit card is to pay twice a month.

If you're using your credit card to improve your credit score, you shouldn't pay too often. Credit bureaus update your report every 30-45 days.

If your balance is zero every time they check, it'll seem like a lack of activity on your card. This won't hurt your score, but it won't boost it either.

Only Spend What You Can Pay Back

This is where your budgeting skills come into play.

You need to make sure you're not spending more than you can afford. One way is to create a budget and be smart about sticking to it.

First, calculate how much money you earn each month. Then, figure out what your regular expenses are.

How to use this to avoid credit card interest?

Once you know how much you have left over after you cover your essential expenses, you can determine how much you can afford to spend on your credit card.

If you set the money aside and don’t exceed the limit, you’ll be able to repay the full balance.

Set Automated Payments

Another way to motivate yourself to repay the full balance is to set automated payments.

That way, the credit card company will automatically withdraw the money you owe. And you’ll avoid late payments and penalties.

What’s more, this might help you get a lower interest rate in the future. If you pay the full sum on time every time, you’ll increase your creditworthiness.

This will give you grounds to renegotiate your credit card terms.

• Time Big Purchases at the Beginning of the Billing Cycle

As we mentioned, you pay interest on a credit card when the grace period is over, and you have an outstanding balance.

To give yourself more time to repay the full amount, schedule big purchases for the beginning of the billing cycle.

But keep in mind that this strategy works only if you pay off the entire balance. If you're late with the payment, it'll have the reverse effect.

Remember the average daily balance?

A big purchase at the beginning of the billing cycle will keep your daily balance high. This will increase the monthly average and, in turn, the interest you owe.

This is how to avoid interest on credit card purchases. Sorry to disappoint you, but they all involve paying back everything.

Let’s see what you can do if you can’t afford it, though.

Find a Card With a Lower Interest Rate

If you can’t repay the full balance every month, you can at least make sure the interest is lower.

Here’s what you can do.

First, try to negotiate better terms with your credit card issuer. If you haven’t paid regularly in the past, they won’t be eager to reduce the rate.

But they might still prefer it to losing you as a client. So, it’s worth at least trying.

If that doesn’t work, you can transfer your balance to a card with a lower interest rate. We discuss how credit card interest works for balance transfer below.

Find an Issuer That Offers a 0% Introductory APR

Many issuers offer a 0% introductory APR on purchases to attract new clients. This means you can carry a balance without paying interest during this period.

While this is very tempting, you should familiarize yourself with all terms first.

Usually, this promotion ends if you don't make the minimum monthly payment on time.

More importantly, check if the issuer charges deferred interest. If that’s the case, the interest will accrue from the date you made the purchase, not the end of the introductory period.

Still, if you stick to these terms, it can take off some of the pressure.

Now, as promised, let’s see how to avoid paying interest on credit card balance transfers.

Avoiding Interest on Balance Transfers

A balance transfer is when you move your balance from one card to another. Typically, it is to get a lower interest rate.

Many credit card companies offer a 0% introductory rate on balance transfers.

This will give you more time to pay off your debt. Plus, you won’t need to worry that the amount is increasing.

However, when the promotional rate expires, the issuer will start charging interest. Therefore, you need to pay off your balance before that happens.

Additionally, there may be other fees associated with balance transfers. So, read the terms and conditions carefully.

If your card doesn't have a 0% introductory period, though, there aren’t any clever credit card tips to avoid interest.

If there isn’t a grace period, interest will start accruing immediately after the transfer.

So, you can't avoid it unless you somehow pay off the balance the same day you transfer the money.

Even then, you'll still have to pay a fee.

Avoiding Interest on Cash Advances

How does interest work on a credit card cash advance?

Like balance transfers, cash advances don’t have grace or promotional periods. Therefore, interest starts accumulating immediately.

Unfortunately, there’s no clever trick you can use to avoid interest on cash advances.

The only way is to pay them off the same day. That way, the issuer will only charge you the fee for the cash withdrawal.

Therefore, we recommend avoiding cash advances altogether.

Wrap Up

When it comes to using credit cards, one of the most important things to understand is how interest works.

Charges can quickly add up, making it difficult to pay off your balance.

To help you, we explained how to avoid interest on credit card purchases, balance transfers, and cash advances.