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How to avoid paying interest on credit card purchases
The best way to avoid paying credit card interest is to pay your statement balance in full by the due date. Understanding how credit card interest works, using interest-free periods wisely and managing your repayments can help you keep more of your money and become debt free sooner.
Are credit cards a good way to manage money?
Credit cards can be a useful financial tool if they’re used responsibly and paid off in full each month.
Using a credit card can make it easier to track spending, manage everyday purchases and access benefits such as reward points or complimentary travel insurance. Making repayments on time can also demonstrate responsible credit behaviour.
However, if you don’t pay your balance in full, interest can build quickly. Before long, you may be paying interest on both your original balance and the interest already charged. This is how credit card debt can quickly become difficult to manage.
How does credit card interest work?
Credit card interest is charged on any balance you don’t pay in full by the due date.
Understanding how interest is calculated, which transactions attract interest and how interest-free periods work can help you avoid unnecessary costs and keep more of your repayments reducing your debt.
Credit card providers generally earn money in two ways. They charge merchants a fee every time a customer pays by credit card, and they charge cardholders fees and interest when balances aren’t repaid by the due date.
Why are credit card interest rates so high?
Credit card interest rates are generally higher because credit cards are a form of unsecured lending.
Unlike a home or car loan, a credit card isn’t secured against an asset. This means the lender carries more risk if repayments aren’t made, so higher interest rates help offset that risk.
Because you can use a credit card to purchase almost anything up to your credit limit, it’s important to understand how quickly interest can increase the amount you owe.
How is credit card interest calculated?
Credit card interest is usually calculated daily, even though it’s advertised as an annual percentage rate (p.a.).
To calculate your daily interest rate, divide the annual interest rate by 365. For example, if you owe $500 on a credit card charging 19% p.a.:
- The daily interest rate is approximately 0.052%.
- On the first day, about 26 cents of interest is charged.
- On the second day, interest is charged on the new balance, including the previous day’s interest.
This is known as compound interest. Because interest is added daily, your balance can grow quickly if repayments are delayed.
How can you use interest-free periods to your advantage?
Most credit cards offer an interest-free period on new purchases if you pay your statement balance in full by the due date.
To keep your interest-free period:
- Only spend what you can afford to repay
- Pay your statement balance in full every month
- Set up automatic repayments so you never miss a due date
- If you carry a balance, repay it in full as soon as possible to restore your interest-free period.
If you don’t pay the full statement balance, any remaining balance will usually attract interest and new purchases may begin accruing interest immediately.
Which credit card transactions attract interest?
Not every credit card transaction is treated the same, and some will attract interest immediately.
Purchases
Everyday purchases such as groceries, fuel and online shopping are generally eligible for an interest-free period if you pay your statement balance in full by the due date.
Promotions
Promotional interest rates can help reduce interest for a limited time, but it’s important to read the terms and understand when the promotional period ends.
Balance transfers
Balance transfers may help you pay off debt faster by offering a lower introductory interest rate. However, it’s important to understand any fees, conditions and what interest rate will apply once the promotional period finishes.
Cash advances
Cash advances usually attract a higher interest rate and typically don’t qualify for an interest-free period. Withdrawing cash, transferring money from your credit card or using your card for certain gambling transactions may all be treated as cash advances.
How can you avoid paying interest on your credit card?
The best way to avoid paying credit card interest is to pay your balance in full by the due date. If that’s not possible, contact your credit card provider as soon as you know you’ll have trouble making a repayment. They may be able to offer financial hardship support or an alternative repayment arrangement.
Life doesn’t always go to plan. Unexpected expenses, illness, job loss or reduced income can make it difficult to keep up with credit card repayments. The important thing is to act early. Ignoring the problem can lead to interest charges, late fees and a growing debt balance.
If your financial difficulty is temporary, ask your credit card provider whether they can extend your payment due date or offer a short-term repayment arrangement. Many lenders are willing to help customers who contact them before they miss a payment.
If you’re experiencing longer-term financial hardship, your provider may offer support such as:
- Temporarily reducing your repayments
- Deferring repayments for a period
- Freezing or reducing interest charges
- Setting up a more manageable repayment plan.
When applying for financial hardship assistance, include:
- Your name and contact details
- Your credit card account number
- A copy of your latest statement
- An explanation of your financial circumstances
- Supporting evidence, such as a medical certificate or redundancy notice
- A realistic proposal for how you’ll repay the debt if assistance is approved.
A realistic budget can make these conversations much easier. Knowing exactly how much you can afford to repay each week or month helps you negotiate a repayment plan you can stick to while reducing your debt over time.
What is the fastest way to reduce credit card debt?
| Instead of… | Try… |
|---|---|
| Paying only the minimum repayment | Pay as much as you can afford each month. |
| Waiting until the due date | Make weekly or fortnightly repayments to reduce your balance sooner. |
| Using multiple credit cards | Focus on paying down one card before using another. |
| Relying on interest-free offers | Build a realistic budget so you can reduce debt consistently. |
What are Tammy’s top tips for avoiding credit card debt?
- Create a budget so you only spend what you can afford to repay each month.
- Automate your repayments so you never miss a due date.
- Pay your statement balance in full whenever possible.
- If you carry a balance, pay it off as quickly as you can to restore your interest-free period.
- Consider switching to a credit card with an interest-free period if your current card doesn’t offer one.
- Make extra repayments throughout the month to reduce your balance sooner.
- Decline unnecessary credit limit increases.
- Avoid paying annual fees for features you don’t use.
- Simplify your finances by reducing the number of credit cards you have.
- Read the terms and conditions so you understand promotional offers.
- Avoid cash advances whenever possible.
- If you’re struggling with repayments, contact your credit card provider early and ask about financial hardship support.
Ready to reduce your credit card debt?
Paying less interest means more of your money goes towards reducing your debt and reaching your financial goals sooner. If you’re ready to take control of your money, book your free, no-obligation appointment with MyBudget today. We’ll help you create a personalised budget and a clear plan to reduce debt faster.
Or call us today on (09) 849 6285 to get started.
This article has been prepared for information purposes only, and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.
