How to Avoid Paying Interest on Credit Card Debt

For many people, credit card debt is a fact of life. And along with repaying the amount you borrowed from the credit card company, you’re also responsible for paying back the amount of interest that accrues — often at a daily rate. 

Most people probably want to avoid credit card interest and debt. With high rates that compound quickly, it’s pretty easy to get buried. However, avoiding interest is often much more easily said than done. With tricky terms and policies that are difficult to decipher, it’s no wonder why so many Americans fall into credit card debt every year: in fact, the average debt is $5,834. 

If you’re in credit card debt, or you’re new to credit cards and want to stop yourself from falling into debt in the future, it’s essential that you know the best ways that you can avoid paying tons of interest.

We'll tell you a secret--the key is paying off your monthly balance each month. However, we understand that's not an option for everyone, so we'll give you some tips to work toward that goal and limit how much interest you have to pay in the meantime.

Select a topic to skip ahead, or simply read through for a full exploration of how to avoid paying interest on credit cards. 

• What is credit card interest?
  • How is credit card interest calculated?
  • Interest vs APR
• Solution: pay off your monthly balance in full
• Tips to help avoid credit card interest 
  • Pay off your full balance, not the minimum 
  • Make consistent monthly payments on any balance you carry
  • Set up a monthly budget

We’ll start with a simple, intuitive definition of interest rates and an explanation of how they work, then move on to strategies you can use to avoid paying interest on credit cards in the future. 

What is credit card interest?

An interest rate is a percentage of the principal balance that is added to your credit card balance. So, in the case of credit card debt, your interest rate is the amount that you owe in addition to the amount that you borrowed.

Interest rates aren’t the only way that credit card companies charge for their services (more on that below), but they’re one of the biggest expenses that are associated with using a credit card. 

The average interest rate on a credit card, according to debt.org, is around 20.21%. While that may sound steep, remember that you don’t actually have to pay interest at that rate unless you carry a balance month-to-month. We’ll explain more about how to avoid interest in the next sections, but first, let’s take a more in-depth look at how credit card interest rates are calculated.

How is credit card interest calculated?

As mentioned before, your credit card interest rate is a percentage of your principal balance that is added to that balance when determining how much you owe. Sound a little confusing? Let’s break it down with an example. 

Let’s say that you owe $500 on your credit card, and your credit card comes with a 17% interest rate. According to Discover Card, credit card interest is often compounded daily. So, the way to find out how much your balance grows each day is to take your annual interest rate — 17% — and divide it by the number of days in a year: 365. 

That gives us a daily rate of about 0.047%. So, on the first day, that interest starts accruing on your balance (the day past the due date, assuming you don’t have a grace period), you’ll owe $500 x 0.047%. That works out to about $0.24 for your first day. 

The next day, however, your balance will be $500.24. That means that the new balance interest payments are based on is that (slightly) larger sum; i.e. the interest rate is compounding daily. So, while that extra quarter may not look like a lot, over the course of the year, it could steadily snowball into larger and larger sums — and that’s assuming you don’t add expenses to your balance by purchasing additional things on your card and not paying it off. 

However, as we previously alluded to, interest rate often is not the end of the story when it comes to the cost of owning a credit card. While your yearly interest rate is what’s used to calculate the rate at which your balance compounds, there’s more going on behind the scenes: that’s your APR. 

Interest vs APR

APR stands for annual percentage rate. When you read through credit card offers, you’ll likely see APR listed rather than interest rate (though both are possible) in many cases. Credit card APR includes your interest rate, but it also includes other factors, like fees associated with the card; most commonly, these are annual fees, the flat cost you pay to own the credit card. 

There are two things that you should note when assessing a credit card’s APR:

1. The real interest rate you pay on your card may not be exactly equal to your stated APR, as credit card companies often don’t account for compounding when advertising APR.
2. Your APR might not account for possible incidental fees, like late payment fees, over-limit fees, cash-advance fees, and others. 

For a glossary of related credit card terms, check out this page on Consumer.ftc.gov. Now that you’ve got a grasp of the way credit card interest is calculated and applied to your balance, let’s shift focus to the ways that you can avoid having to pay any interest in the first place. 

Solution: pay off your monthly balance in full

The simplest way to avoid paying interest on your credit cards is to simply pay your bill off in full every month. In fact, if you pay your full balance every month, your credit card’s interest rate mostly won’t matter to you at all, as you won’t pay interest on your balance.

Keep in mind, however, that some fees may still apply, including (but not limited to):

• Annual fees: the amount some credit card companies charge just to own the credit card
• Over-limit fees: an amount you’ll pay if you spend more than your credit limit in a month
• Cash advance fee: an amount some credit card company may charge if you get a cash advance through your line of credit, as you might through an ATM or bank teller
• Foreign transaction fee: the amount some companies charge for using your credit card in a foreign country

If you own multiple credit cards, be sure you read the fine print and familiarize yourself with the different policies and fees associated with each card. 

Note: It’s important to know when to pay your credit card balance to avoid interest. Be sure to mark the due date on your calendar or set up text alerts so you never miss a payment. 

Paying off the balance in full can be difficult in some cases, but don’t worry. There’s still more you can do to avoid the worst of interest payments.

Let’s take a look at some simple tips and tricks you can use to minimize the amount that credit card interest payments have an effect on your financial wellbeing. 

Tips to help avoid credit card interest

Staying on top of your payments, paying off your balance, and ensuring you’re aware of all the fine print and policies associated with your card can be a hassle. However, it’s important to stay on top of each of these when you own a credit card. 

Depending on your specific situation, there are a few different tips that you can use to ensure that you’re staying on top of your balance and avoiding credit card interest. 

Pay off your full balance, not the minimum

This is worth stressing because many first-time credit card owners get this confused. When you log onto your credit card account portal, you’ll likely see two dollar amounts listed:

• Card balance: This is the total amount you owe your credit card company. This is the amount that should be paid in full each month.
• Minimum payment: This is the amount you must pay by the due date in order to avoid late fees. However, for most cards, you’ll still owe interest on your balance even if you do make the minimum payment. 

When you go to actually make a payment on your balance, you may even see a third option: the amount you paid the last time you made a payment on the account. While that might be useful in some circumstances (like paying off a large balance over time), in general, it’s smartest to simply pay off the entire balance currently on the card.

This is the only way to truly ensure you don’t pay any interest (apart from what you may have paid if you did already miss a payment). 

Make consistent monthly payments on any balance you may carry

If you do happen to carry a balance on your credit card month to month, paying it down should be one of your top financial priorities.

The best way to stop interest on credit card debt long-term is to pay off your balance. You can do this by making:

• Multiple smaller payments throughout the month.
• A large lump-sum payment once a month.
• Increasing the amount you pay each month to help pay off more and more of the balance.

Credit card debt can put a serious dent in your financial health and even your credit score — but making consistent, timely payments can help. 

If you need to make a larger purchase and don’t think you’ll be able to make the monthly credit card payments afterward, you may want to consider other lending options. You can read this guide on Consumer.gov for more information. 

Steps to take to ensure make consistent payments:

1. You can incorporate monthly payments into your monthly budget.
2. Set reminders to pay your credit card bill near the due date to ensure that you stay on top of your balance. 

In fact, budgeting is generally a wise idea when it comes to credit card usage and learning how to stop paying interest on credit cards. 

Set up a monthly budget

Budgeting is a good idea regardless of your credit card situation, but it’s also a clever way to ensure you’re not losing money (and risking your financial health) to credit card interest payments.

By setting up a monthly budget or spending plan, you can:

• Make it easier to keep track of your spending
• Ensure you're not putting more on your card or cards than you’re able to pay back in a month. 
• Have a plan for limiting how much you're putting on your credit card and therefore, the interest you accrue.

If you need help starting a budget, the Mint app is especially helpful, as it not only helps you organize and categorize your spending, but can even give you a birds-eye view of your full financial profile — including active credit card balances.

Credit cards can be a useful and convenient tool for daily spending if actively and cleverly managed. By combining a diligent budget with smart credit card usage, and knowing how to avoid paying interest on credit cards, you’ll be well on your way to stronger financial health. 

TransUnion | Debt.org | Discover | Consumer.ftc.gov | Consumer.gov