- Personal Finance
How to Never Pay Interest on a Credit Card
Credit Cards: Friends or Foes?
A credit card is definitely a double-edged sword. You have probably heard "horror stories" about them and their interest rates, but they can in fact save you money with proper use. The following are some of the main benefits of credit cards:
- Borrowing money from the bank for free: This is essentially what happens if you always pay the full amount on your credit card statement on its due date, or before.
- Accumulating rewards: Most credit cards accumulate points of some type, which can then be used to purchase products for free. In some cases, you may even be able to get free airline tickets with credit card points. Alternatively, you may get cash-backs on some specific product purchases.
- Delaying your payments in cash: If you pay for your expenses with a credit card instead of with cash, and then pay the credit card balance before the due date, you will be able to hold on to the cash longer. This accumulates interest, but in your favor!
Rule #1: Keep Track of the Closing Date and Payment Due Date
Of course, the benefits of a credit card mean nothing if you are constantly paying interest. To avoid paying interest, first you have to understand two concepts: the closing date and the payment due date.
The closing date is the day of the month when all purchases from the previous 30 days are added up and billed to you. For example, if your next closing date is on May 10th, on that day you will be billed for all expenses between April 10th and May 9th.
The payment due date is the day of the month when you are required to pay the balance from the last closing date. The period between these two days is a grace period, and if you pay your balance before this period ends... you pay no interest. If the payment due date on the card in the example above is May 25th, you will only pay interest if you pay your balance on the 26th or later.
Rule #1: Always pay your balance within the grace period between the closing date and the payment due date.
You can continue using the credit card for purchases between these two dates, because these purchases will be carried over to the next billing period. In fact, it is recommendable to use your credit card on the first few days after the closing date because you will have an entire billing period and a grace period on which you pay zero interest.
Rule #2: Never Let Credit Card Purchases Exceed Your Cash Availability
If you use the credit card on a daily basis without keeping track, you may be in for a surprise when you receive the balance statement. Instead, write down all of your credit card purchases on a spreadsheet in Microsoft Excel or a similar program. With the same spreadsheet, keep track of how much cash you have available on your bank account.
Rule #2 is to never allow your credit card balance to go higher than your available cash. This ensures that you will always be able to pay your credit card balance on time.
This is much easier to accomplish if you activate electronic banking services. This way, you can check both the cash in your savings account and the current balance on your credit card with just a few clicks.
As Simple as It Seems, That's It!
Following those two rules is all that is needed to never pay interest on your credit card. If you never miss your payment due date and never let you balance exceed your available cash, you will never pay interest on your credit card purchases.