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Having a credit card has never been more expensive. Americans pay $120 billion in credit card interest and fees each year.
It’s unlikely to get better anytime soon. Over the past few years, the Federal Reserve has hiked interest rates, which can affect credit card rates. Case in point: The average credit card interest rate is over 20%, a record high.
If you want to avoid paying extra, here are five strategies to help you avoid paying credit card interest.
1. Pay your balance on time and in full
The number one strategy to avoid paying interest on a credit card is to pay your balance in full each month.
This can be easier said than done if you’re struggling to make ends meet, but it’s an important practice to try and follow.
“When consumers carry a balance month-to-month, this interest compounds, leading to rapidly growing debt. Over time, this can result in paying significantly more than the original purchase price for items,” says Taylor Kovar, CEO of Kovar Wealth Management.
Snowballing debt is one reason why it’s a good idea to pay your balance in full each month. When you don’t carry a balance, you can enjoy the benefits of credit cards — and their rewards — without paying a steep price.
If you’re having trouble paying your balance in full each month, try creating a monthly budget. That way, you can track your spending and avoid racking up more charges you can’t pay.
A budgeting app can help with this. There are many popular options out there that can help you monitor and set limits on your spending.
2. Negotiate a lower interest rate
Want to save money on interest? Just ask.
Credit card interest rates can be negotiable, especially if you have a good credit score. You may get a lower interest rate by calling your card issuer. This may sound intimidating, but can be effective. Just be sure to do your homework first.
Start by looking at what other card issuers are charging for comparable cards. Have this information available when you call to discuss a possible reduction.
When calling, mention if you have a positive payment history or recently improved your credit score. The same goes for if you’re a long-time customer.
Remember, the worst they can say is no. If they decline your request, you can explore other card options with lower rates and transfer your balance to save on interest.
3. Using a balance transfer card
When used responsibly, balance transfer credit cards can help you avoid paying interest and get out of debt faster.
If you have multiple cards with outstanding balances, consolidating onto one card may be smart. This strategy allows you to simplify your payments and secure a lower interest rate.
Balance transfer cards offer a 0% interest rate for an introductory period, often between six and 24 months. You can pay down your balance during that time without incurring additional interest charges.
But you need to have a plan to pay it off. Once that promotional period is over, you may face a higher interest rate, potentially leaving you worse off.
It’s also essential to understand the fine print with balance transfer credit cards. Most charge a balance transfer fee of anywhere from 3%-5% of the total transferred balance.
Let’s say you’re transferring an $8,000 balance, and the card charges a 5% balance transfer fee. You’ll have to pay a $400 fee to make the transfer, which is added to your overall balance.
4. Pay off high-interest debt
If you have debt, it’s a good idea to identify and focus first on the ones with the highest interest rates. Prioritizing your costliest debts can free up money to pay off other debts more quickly.
This is known as the avalanche method. You’ll focus on paying off the debts with the highest interest rates first while making minimum payments on other debts. Once the highest interest debt is paid, you move on to the next highest interest debt. This method is one of the fastest ways to get out of debt and avoids the most interest.
Another way to pay down debt is the snowball method. You’ll focus on paying off your smallest debts first while making minimum payments on larger debts. This way, you can gain momentum as you pay down each smaller debt and roll that payment amount into the next. This method aims to build motivation by creating small wins along the way.
Whichever strategy you choose, the most important thing is to be consistent over time.
5. Avoid cash advances and other high-fee transactions
Many credit cards allow you to get cash from an ATM — known as a cash advance. Withdrawing money from your credit card can seem convenient, but it’s an extremely costly way to access money.
Cash advances often come with high interest rates that accrue immediately without any grace period. Plus, you’ll usually have to pay a fee between 3%-5% of the transaction.
Other high-fee transactions like convenience checks may also come with fees that can add up. To minimize these costs, it’s generally best to avoid these types of transactions.
“Instead of resorting to cash advances, consider alternative options like personal loans or borrowing from friends or family for urgent cash needs,” says Kovar.
The bottom line
Credit cards can be a valuable financial tool, allowing you to make purchases in a pinch when you may not have the cash on hand.
But they can come with some real downsides if you’re not careful — through fees and interest charges. And with interest rates at historic highs, carrying a balance has never been more expensive.
If you want to avoid paying interest on your credit card, start by paying your balance each month. Consider a balance transfer credit card if the balance has grown higher than you can afford to repay. You may also want to consider debt payoff methods like the avalanche or snowball methods. And over the long term, establish a budget that allows you to keep up with your spending.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.
