How to Keep Credit Card Interest From Eating Your Rewards
- June 12, 2018
- Posted by: Melissa Horton
- Category: Credit Cards
Earning rewards on credit card purchases can be a lucrative endeavor, especially for cardholders who know how the system works. Putting everyday purchases, major expenses, and everything in between on a credit card to maximize rewards can be a value-add to your financial life, but it comes with risks.
Unfortunately, the credit card interest charged on balances not paid off every billing cycle can add up to a pretty penny, quickly eating away at any rewards earned during that period.
Figuring out the tricks to avoid excessive credit card interest charges during a billing cycle can be a challenge. However, if you are able to follow some of the tips below, you may reduce your total interest charges over time. Doing so will improve the value of your rewards, even when you carry over a balance from one month to the next.
What is a Regular Purchase Interest Charge?
Before diving into the methods for reducing a purchase interest charge on your credit card, there are a few things to understand about the various types of interest charges.
Purchase interest charges are those calculated off the balance remaining from billing cycle to billing cycle, plus any new purchases made during that time. The actual amount of the purchase interest charge is dependent on your credit card’s interest rate, which is typically the annual percentage rate, or APR.
To calculate interest charge on purchases, break the APR down to a daily number, since interest accrues each day, and then average out your daily balance. Multiply the average daily balance by the daily APR, and then multiply that by the number of days in your billing cycle.
Some cardholders see a higher amount than they expect because they have a balance remaining from a previous month, or because they have added new purchases to the card without paying them off. These activities increase the average daily balance, especially when no payments are made throughout the month.
What is a Cash Advance Interest Charge?
A credit card cash advance is simply a method to take cash from your credit limit without making a purchase. It works similarly to an ATM withdrawal from your bank, but it comes with a hefty price tag.
Cash advance APRs are often a few percentage points higher than the purchase APR, which means if you carry over a balance from month to month, you end up paying even more in interest charges. The calculations are the same for cash advance interest charges, but they only apply to these types of transactions, not purchases.
Making the Most of the Credit Card Grace Period
If you’re concerned about the purchase and cash advance interest charges, you might be able to take advantage of the grace period on your credit card. The grace period is a length of time, legally no less than 21 days, in which any new purchases made on a credit card may be paid off without incurring an interest charge.
So long as the new balance is paid within that timeframe, you do not owe interest, and ultimately, your balance does not balloon over time. Not all credit card companies offer grace periods, but for those that do, it is described in the credit card agreement.
If you can pay off new transactions during the grace period, you can maximize your rewards by not paying for interest charges. You also keep your next billing cycle’s interest charges at a lower amount because you have not increased your average daily balance. This tip, combined with a few below, will help make the most out your rewards.
Tips to Help You Save Money on Credit Card Interest
In addition to understanding and utilizing your grace period, you might also consider the following for saving money on interest charges each month:
Paying Twice a Month
When you are carrying a credit card balance, paying twice a month can be a significant cost-saving strategy. Potentially, one payment could make it within the grace period and possibly lower your average daily balance. The second payment, so long as it is made by the due date each month, keeps you on track to pay down your balance on time. Even if you are paying the minimum, paying twice per month instead of only once reduces the interest charge calculation.
Paying Every Two Weeks
Similarly, paying every two weeks can be beneficial in lowering the total amount you are charged in interest. Not only does this allow you to make a payment during the grace period, but it also adds an additional full month’s payment for the year. The sooner you are able to pay down an outstanding balance, the less money you will pay in interest charges.
Setting Up Autopay
Several credit card companies, including Chase, Discover, and American Express, allow you to make automatic payments on your credit card from a checking or savings account. This is beneficial if you want to make a payment during the grace period. It also helps in creating a track record of on-time, in-full payments to your card. Interest charges compounded by late fees mean paying off an outstanding balance could take a longer amount of time.
Use these simple tricks of the trade to help manage your credit card payments and interest accruals over time so, ultimately, you end up paying less for borrowing.