You Don't Have to Pay Credit Card Interest

Frankly, credit card interest scares the heck out of a lot of people. They have stories from friends and relatives that have gotten into trouble with their credit card interest and had to pay a lot of money. In fact, a NerdWallet study found US households that carried revolving credit card debt paid $1,000 a year in interest. But here's the thing, your credit card's interest rate doesn't have to matter. You can put yourself in a situation where you can ignore the APR completely. Let's talk about that. So before we get into the juicy advice about APR, let's get clear on what an APR is. An annual percentage rate is the interest you pay on your credit card balance when you don't pay it off in full every month. So in a simplified example, if you had $1,000 balance, you would pay $250 in interest. Unfortunately, APR calculations aren't quite that simple, but we'll talk about that in a minute. So where do you find your APR? There are a number of ways you can find out. You can find your APR in your credit card app or in your online account. You can also find it on the marketing webpage for the card. You can find it in your monthly statement, and that might be the easiest place to find it because you're always gonna have a monthly statement. You can also look up your card's terms and conditions. That's kind of the fine print that comes along with the card. Or if all that fails, you can just dial the number on the back of your credit card and ask the customer service representative, what is my APR for this card? So how is interest calculated? Well, APR is applied to your average daily balance. And basically that means when interest is charged, it's not just a snapshot of your balance on a single day during the month, but it's the average of all the days during the month. So what does this mean? It means there's no way to game the system by paying down your balance just before your billing cycle ends, for example. So another thing to know is that your APRs can change over time. It's not the same as when you first get the card. It can change based on market conditions, for example. APRs move in lockstep with short-term interest rates. So when you see the Fed move rates up or down, your APR is likely to change too. It can also change if your credit rating changes, if your credit score changes. If it goes significantly one way or the other, you could see your APR go higher or lower. So what is a good APR? Well, a good APR is none at all, of course, but you're not gonna find a regular credit card that has no APR at all, aside from some introductory offers. But generally, the better your credit score, the lower your APR. So a person with bad credit might be paying near 30% APR, while a person with good credit might pay under 15%. And that makes sense, right? If you think about it, a bank will charge you more money if you're a bigger credit risk. So there's a higher APR associated with that. As we record this, the US average credit card APR for those carrying a balance is a little over 16%. So we talked about what an APR is, but I said at the beginning that your interest rate doesn't really have to matter. And how can that be if all credit cards have an APR? Well, the answer is your grace period. When you carry a balance, you don't get a grace period. The credit card charges you interest from the moment you make the purchase. But if you pay off your bill in full every month, you do get a grace period. That's the time between when your billing cycle closes and when your bill is due. And that is by law, that has to be 21 days. So if you pay the balance on your statement in full by the due date, you won't be charged interest for the purchases you made during that entire billing cycle. The credit card company essentially loaned you money for free, that's how your APR doesn't matter. If you get in the habit of paying off your credit card balance in full every month, your APR is just irrelevant. Paying your bill in full every month is a worthy goal. That's because credit card interest is super expensive. If you keep an average balance of $5,000 on your credit card and you pay 16% interest, which again, that's about the average for those who carry a balance, you'll pay $800 in interest during the first year. And in five years, $4,000 in interest. So think about that. For the privilege of carrying a $5,000 balance for five years, you'll pay $4,000 in interest. Just to put that in context, the average one person US household only takes home about $38,000 a year. So that $5,000 balance costs more than 10% of their income just for interest on a single credit card. And one more way to think about it. Assume you go out to a nice dinner, $100 dinner, and charge that to the card. After five years, that dinner is gonna cost you $180. So let's look at another example. This time, we'll assume you pay just the minimum payment each month on that same $5,000 balance. Again, your APR is 16%. And let's assume your minimum payment is $100 a month. Even if you never added another charge to that card, it would take seven years to pay that off. And meanwhile, you'll be paying interest the whole time. Interest during that time would cost about $3,300. So that makes a $5,000 balance cost $8,800. So the point here is that paying more than the minimum payment can really help. So let's say you pay an extra $50 a month on top of the minimum payment. You can be debt-free in about three years. That's twice as fast as if you paid the minimum payment alone. That's the power of paying credit card debt as quickly as possible. And of course, after getting out of debt, if you pay off your balance right away at the end of the next month, you would pay nothing in interest, zero, nothing. So how to pay off your credit cards? While getting out of credit card debt is a worthy goal, it can be confusing if you don't have a plan. So whatever method you use, the bigger point is to start now. It's like keeping a clean email inbox, sometimes called inbox zero. You have to get it down to zero in the first place with the goal of keeping it at zero. So here are some ideas for paying off credit card debt. So the first method is the debt avalanche. And with the debt avalanche, you line up all your debts from highest interest rate to lowest interest rate. And then you pay the minimums on everything else. When you have extra money, you put it toward the most expensive debt. So that's the top one on the list that has the highest interest rate. And then mathematically, the debt avalanche is gonna save you the most in interest. The other one is a debt snowball. Now this is kind of similar. You still pay the minimums on everything, but you line them up in a different order. You line them up from the smallest amount to the largest amount. And so very quickly, you'll wipe out the first one on your list because it's so small. And that'll give you motivation to go on, which can be really important when you're paying off debt because typically that's not a lot of fun. So where do you get all this extra money? I know everybody has extra money, right? So the first place though to look is savings. Do you have savings while having credit card debt? Think about that. It doesn't really make sense to pay 20% or whatever your APR is on your credit card debt at the same time making less than 1% on your bank savings. So you can use one to pay off the other and you'll be better off for it. Another way is to make multiple payments. So you don't have to wait to the end of the credit card billing period to make payments. You can make multiple in the same month. And the result is likely to be that you pay more and you get out of debt quicker. Yet another thing is windfalls. Whenever you get some extra cash that can be from a tax refund or maybe a bonus at work, throw a big chunk of that on your credit card debt and you're just gonna get out of debt a lot quicker. Staying out of debt, granted, it's easier said than done. And it's easy to let your balance roll over from month to month. But we've done the math here. You can see how the interest can just get ridiculous over time. That's the trick to not caring about your APR. You pay off your credit card balance in full every month and you maintain your grace period so that you don't pay any interest. If you can get to a point where you're regularly avoiding credit card interest over your whole lifetime, you'll easily save thousands and thousands of dollars. And bonus, you'll probably have a lot less money stress too. I'm Greg Karp, credit cards expert at NerdWallet. If you're interested in learning more about your credit card APR, use some of our debt calculators on nerdwallet.com. And if you have a tip to share about staying on budget or paying off your credit card bill in full, tell us down in the comments.