There’s a simple way to avoid paying interest on all your credit card purchases: Pay your bill in full every month. You won’t need a credit card with a 0 percent APR period, or have to sweet-talk a customer service representative into waiving charges. You can make the interest disappear on your own.
Just about every credit card on the market today offers a “grace period,” during which you won’t be charged interest. This period starts when your issuer’s billing cycle closes and ends on your bill’s due date — typically about three weeks later. You’ll generally qualify for the grace period if you paid your bill in full the month before.
About 30 percent of cardholders pay in full every month, according to a recent study by the American Bankers Association. Most of them won’t pay a penny of interest, so the APRs on their cards don’t matter at all. By changing your habits, you can join them.
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Amazing Grace Periods
Think of the grace period on your credit card as a courtesy interest-free loan from your credit card company. It’s not required by law. But almost every credit card on the market comes with one — and perhaps that’s because an old billing practice made them standard, before credit cards even existed.
“Traditionally, banks have provided interest-free periods because they were a remnant of store credit,” says Nessa Feddis, the American Bankers Association senior vice president for consumer protection and payments. “People were billed at the end of the month interest-free. It’s just a matter of convention.”
Credit card grace periods typically apply only to purchases, not balance transfers or cash advances, which start accruing interest right away. Here’s how it works:
1) Your billing cycle begins. Purchases you make will post to your account and appear on your next statement. During the billing cycle, which lasts about a month, interest does not accrue on new purchases.
2) Your billing cycle ends. After the cycle ends, your issuer sends you a bill, noting your due date, minimum payment and total balance. Under the Credit Card Act of 2009, issuers must provide this to you 21 days before the end of the grace period. Note that the law doesn’t mandate a grace period; but if there is one, this 21-day window applies.
3) The grace period begins. This interest-free period typically lasts 21 to 25 days. You can learn about yours by checking your card’s Schumer box, the chart listing all your card’s rates and fees.
4) The grace period ends and your payment is due. If you pay in full by the due date, you won’t owe any interest. But if you carry any of your balance to the next month, interest will start accruing at this point.
Under current credit card billing practices, you can get both an interest-free purchasing period and a 21- to 25-day interest-free grace period every billing cycle. When you put those two together, it can add up to almost two months.
Say, for instance, you make a purchase on the first day of your billing cycle. With an active grace period, you’d likely have more than 50 days to pay that off without incurring any interest charges, whether it was a pack of gum or an airline ticket. That gives you plenty of time to pay off the purchase in full.
Skip Interest, Earn More Rewards
When your credit card interest rates stop mattering — that is, when you start paying your credit card bill in full every month — it opens up your credit card options in a big way. You no longer have to limit yourself to low-interest credit cards with meager rewards. Instead of thinking about how to minimize costs on a card, you can focus on maximizing rewards.
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Compared with low-interest credit cards, rewards credit cards offer more points, miles or cash back on every purchase. With a credit card that fits your spending habits, you could earn hundreds in rewards almost effortlessly. Rewards tend to come with higher APRs — but that’s beside the point. You’ll be able to get all these benefits without paying any credit card interest whatsoever.
Credit card interest rates don’t have to affect you at all. But when you’re carrying debt, even just for a month or two, they make a big difference. Many card issuers cancel the grace period for any billing cycle in which you carry a balance from the month before. When this happens, interest starts accruing on new purchases right away, according to the Consumer Financial Protection Bureau. But previous grace periods aren’t affected, notes Lauren Saunders, associate director of the National Consumer Law Center.
“If you lose your grace period by not paying in full, they cannot go back to revoke the grace period from two months ago and charge you interest two months back,” Saunders says, citing a provision of the Credit Card Act. Even so, the costs of carrying debt can add up quickly. If you find you can’t help but carry a balance, you need a low-interest card.
[See: 12 Ways to Be a More Mindful Spender.]
Make Your Interest Rate Meaningless
It’s up to you to make your credit card’s interest rate irrelevant. Start by paying your balance in full every month. Limit your spending and, if you’re starting with a larger balance, build a debt payoff plan so you can get to paying in full as soon as possible. Eventually, you’ll forget what paying credit card interest feels like.
In time, your credit card interest rate won’t matter to you at all. And that’s how it should be.
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When Your Credit Card’s Interest Rate Doesn’t Matter originally appeared on usnews.com
