4 min read

How to avoid paying credit card interest

Written By

Clay Shiffman

A credit card helps you make purchases online and in-store wherever you go. You get what you were looking for today, and worry about paying your credit card balance later. The buy now pay later model gives you the power to make purchases by borrowing from the credit card issuer as long as you pay off the balance on time.

However, with the purchasing power of a credit card comes greater responsibility to have solid financial management skills and spending habits. Credit card interest is expensive, so carrying a balance can cost you a significant amount. Whether you have credit card debt or want to avoid paying interest charges, here's how to reduce or eliminate it.

What is credit card interest?

When you use a credit card, you're borrowing money from the credit card company to make purchases up to the predetermined credit limit. Interest is the cost of borrowing money and is an annual percentage rate (APR) on your contract. If you pay your credit card statement on time and don't carry a balance, you don't have to worry about credit card interest rates.

However, if you have an outstanding balance, the unpaid portion carries over into next month's billing cycle. You accrue interest charges on the unpaid credit balance, which gets added to the next credit statement with any other credit card fees. You can reduce interest charges by paying down more of your revolving credit and paying off your balance by the due date.

How is credit card interest calculated?

Credit card interest is calculated using a formula that includes the outstanding balance, APR, and period for which interest is calculated. The APR can be a fixed or variable rate that fluctuates. Since APR is the yearly interest rate with applicable fees, you can find the daily periodic rate by dividing the APR by the number of days in the year to find the daily interest rate charged.

Get the average daily balance by adding the outstanding balances on your credit card for each day of the billing cycle and dividing by the total number of days in the cycle. Multiply the daily periodic rate by the average daily balance to calculate your daily interest charge. Multiply the daily interest charge by the number of days in the billing cycle to get the total interest charge for that cycle.

What's the difference between credit card interest and APR?

You'll typically see the terms interest rate and APR on credit cards interchangeably and wonder if credit card interest is yearly or monthly. In most cases, credit card interest and APR refer to the same thing on your credit card contract. The main difference between credit card interest rates and APR is APR may also include other costs, such as application, administrative, origination fees, and more. APR may be higher than the percentage you see for the interest rate on your loan.

Why you should avoid credit card interest

Interest charges can be expensive, and there's no need to pay money for something you can avoid. Interest rates on a credit card are some of the highest you may see for credit accounts. Since the interest rates compound, your charges become increasingly higher the longer you wait to pay off your debt in full.

Compounding interest also makes it harder for you to get out of credit card debt, as you pay interest on interest as you carry the balance month-to-month. Certain features can help you avoid credit card debt and interest fees in the first place. For example, you can take advantage of the credit card's grace period, which is the time between when you get your monthly statement and are required to pay off the balance. Avoiding interest charges can save you hundreds or thousands of dollars in the long run.

Ways to avoid credit card interest

Good credit management skills and spending habits can help prevent you from accruing any credit card interest. Here are some tips to avoid paying interest.

Use budgeting apps to track spending

If you're always maxing out your credit card or going over the limit, you may be spending too much money. Budgeting and tracking expenses can prevent overspending and avoid racking up a statement balance you can't afford. Create a realistic budget based on your monthly income and financial goals. Paying off existing debt is a priority, but you may also want to set aside money for a house, a new set of wheels, or a family vacation.

Once you know your monthly income, review your last few credit statements and how much money you spend in different categories. How much of your monthly income is going towards necessary and unnecessary expenses? Do you still have room to save for your goals and invest in your future?

Decide on an attainable budget for monthly expenses based on your needs and wants. If you're overspending, consider where you can cut down on spending money, like eating out or going to the movies. Budgeting apps can help you build good spending habits by keeping you within a limit. As you track your spending, you'll know exactly how much you've spent and when to stop.

Only put purchases on your credit card you can afford

You borrow money from the credit card issuer every time you swipe your credit card. It's tempting to spend as much as your limit as you don't have to worry about paying the statement balance until later. However, you may not have the money to pay off your balance. You should ideally only spend money you can pay off on time or already have in your bank account. Otherwise, you may find yourself with too much interest on your credit card balance.

Pay your credit card bill in full each billing cycle

Paying your credit card bill before the due date is one of the easiest ways to avoid interest charges. Credit cards have a minimum payment requirement to avoid interest fees at the end of the card's billing cycle. While you should at least pay the minimum payment, it's good financial behaviour to pay the full balance as soon as possible. You avoid carrying a balance, paying expensive fees, and lowering your credit history.

Consolidate debt with a balance transfer credit card

Consolidating debt refers to when you combine different debts into one loan, typically with a lower interest rate. You can use balance transfer credit cards to transfer outstanding credit card balances to a different loan. It's easier to manage one loan than multiple debts, and you have lower interest rates and longer payment schedules.

Get a 0% introductory APR card

A 0% introductory APR card has no interest rate during the introductory period. If you need a few months to sort through your debt and pay off your outstanding credit card balance, a 0% APR credit card can offer an interest-free way for you to slowly reduce your balance. Ensure you pay off the full balance before your credit card starts to charge interest.

Where can I find my credit card's interest rates?

You can find your credit card's interest rate on your contract, typically expressed as an annual percentage rate. APR is the cumulative interest rate over a year, and you can find the daily interest rate by dividing it by 365 days as interest compounds daily. For example, if the APR is 20.99%, the daily interest rate is 0.0575%. Credit card interest rates can change based on the prime rates. If the prime rates go up, the interest rate on your credit card likely increases as well.

Negotiate a lower credit card interest rate

It's possible to negotiate credit card interest with the credit card company to pay off your debt faster. Call the company and explain why you want a lower interest rate. Some issuers may be willing to give an interest rate break. However, getting one may be easier if you have a better credit report and show low-risk financial behaviours, like paying your bills on time and having low balances.

What are the different types of interest rates?

There are three types of interest rates:

  1. Variable interest rates change over time based on the prime rate set by the Bank of Canada and how credit card companies respond.

  2. Fixed interest rates aren't influenced by the prime rate but may increase due to late or missed payments.

  3. Introductory or promotional rates are typically offered to new cardholders for a specified period.

Find the right credit card with KOHO

A credit card, like a virtual credit card, can be a powerful tool if used correctly. You can make purchases from the convenience of your mobile wallet and earn rewards along the way. Whether you're looking to build credit or manage your spending, we can help. Easily track your expenses and set limits that match your budget. You can sign up for overdraft protection coverage to avoid expensive penalties if you go over your credit limit occasionally.

Your payment history influences your credit report and your interest rates. Too many late or missed payments can result in higher interest rates on your credit card account. Regularly monitor your credit history with a free credit score to stay on top of debt payments and get helpful insights that can help improve your finances and protect yourself from rising interest rates.

Learn more about how you can get started on your finance journey with KOHO to build your credit score, earn interest, maximize your savings, and work towards financial freedom.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!