Loans Are Not Usually Free, But Credit Cards Can Be
Whenever you get a loan, you’ll usually be charged interest. Interest is a fee you pay a lender for borrowing their money. Most of the time it’s a percentage of the amount you borrow.
With credit cards, the interest rate is called an Annual Percentage Rate, or APR. The APR is effectively the interest rate you would pay if you were to borrow money on a credit card for a year.
Since credit cards are a type of loan, it would make sense that you would have to pay interest any time you use the card because you’re effectively borrowing money. However, with most credit cards you can avoid paying interest completely when you’re using them for purchases.
Many credit cards will have several different APRs:
- Purchase APR – This is the APR you’ll pay on normal purchases, but usually only when you carry a balance to the next statement period. It’s sometimes known as the Regular APR.
- Balance Transfer APR – When you transfer a balance from one credit card to another, this is the APR you’ll pay on that debt. Sometimes it’s the same as the Purchase APR, but it can be different. With most cards, you start getting charged interest immediately (with no grace period) on balance transfers if you don’t have an introductory balance transfer offer.
- Cash Advance APR – When you use your credit card to withdraw cash at an ATM, you’ll pay this rate. Interest is usually charged starting the day the cash is withdrawn, so there’s no grace period. This APR is often higher than the Purchase APR.
- Introductory APR – Some cards will offer a special, lower APR on purchases, balance transfers, or both. It’s “introductory” because the special APR, often 0%, only applies for a limited time after opening the card.
Avoiding Interest on Regular Purchases
With most credit cards there is a grace period, where no interest is charged on new purchases. Interest charges will only accrue if you carry a balance on your card from month to month (called “revolving” a balance).
To avoid interest, all you need to do is pay off your new balance in full by the time the bill is due. You can do this when you get your statement, or even beforehand during the month. Most credit card issuers will let you connect a checking account and automatically pay the full new balance on the due date of the card each month.
While most credit cards work this way, not all credit cards do. Some cards begin charging interest on purchases immediately. Other cards start with a grace period, but it’s possible to lose the grace period if you make a late payment, for example. Make sure you read the terms of your card to find out how its grace period works.
And that’s all there is to it. Avoiding interest on regular purchases is easy with most cards, there are no complicated credit tricks to learn. Keep reading to learn how interest works on cash advances and balance transfers.
Avoiding Interest on Cash Advances
Unlike regular purchases, cash advances will usually begin accruing interest immediately.
This means that you won’t be able to avoid paying some amount of interest on a cash advance unless you pay it off the same day.
Additionally, most credit cards will charge you a fee for doing the cash advance. Even if you pay back the amount of the cash advance, you’ll still pay the cash advance fee. A typical cash advance fee is 5% of the amount withdrawn, with a minimum fee of $10.
Avoiding Interest on Balance Transfers
Some cards offer a 0% introductory APR for balance transfers. These offers are designed to attract new customers who are paying interest on another card and want to reduce the amount of interest they’re paying each month.
If you have a 0% introductory balance offer, you’ll usually be able to avoid paying interest on the transfer as long as you pay it off within the specified time period. Sometimes delinquencies, like a late or returned payment, can end the 0% introductory period.
Also, watch out for the terms of your card — some cards will come with a 0% APR intro period on purchases, but once you transfer a balance to the card new purchases could switch to the higher regular purchase APR.
If your card does not have a 0% introductory offer, but you still transfer a balance to move credit card debt to a lower APR, interest usually starts accruing immediately. You won’t be able to avoid interest unless you can somehow pay the balance the same day you make the transfer. Additionally, you’ll usually be charged a fee to transfer a balance to the card unless there is a special promotion.