How to avoid paying any interest when using that shiny new credit card
- Pay it off in full each month
Always pay it off in full. That’s it. That’s the best way (imo, and money saving expert Martin Lewis too) to avoid paying interest on your credit card.
Credit cards are designed for short-term borrowing needs. If you want to borrow for longer than a month, it may be better for you to consider getting a loan, or making fewer purchases if they are not essential.
2. Don’t just pay the minimum amount
Don’t just pay the minimum amount, it sounds obvious but if you’re new to the world of credit cards you might not be aware.
With APR ranging from 15% all the way up to 40%, a small amount unpaid at the end of the month can quickly become expensive.
Use the Money Supermarket Card Interest Calculator here to get an idea of how repayments can quickly grow if you don’t pay off in full each month. Sometimes it is worth borrowing more than you can pay off at the end of the first month, but there is a cost to it, which you should work out in advance.
For example, if I buy a bicycle by borrowing £1000 on my (25% APR) credit card in September and I can afford to pay it off at roughly £300 per month (starting October, then November, December) until January, it will cost me £43 in interest. When I’ve paid it off I will have paid £1043 for an item that would cost someone else £1000. Now this might be worth it to me, or it might not. If getting the bike means that I ride to work every day and save £300 on tube fares in those three to four months, then this starts to look like a properly wise decision.
3. Set up a direct debit
Some people find the easiest way to pay off in full every month is to set up a direct debit for the full amount, that way it’s paid off before the bill due date and the risk of missing a payment is significantly reduced, and you help yourself avoid those pesky interest charges for not paying off the full amount.
Direct debits are a way to pay regular bills from your current account, such as your council tax or TV licence. Read more: What is a direct debit?
4. Avoid cash withdrawals with a credit card
Also, many people recommend avoiding withdrawing cash from an ATM on your credit card. Most credit cards will charge you interest from the moment you withdraw cash, and usually comes with a fee for doing so, as well as even a slightly higher interest rate. Withdrawing cash on your credit card can be very costly. Even cards designed for foreign travel like the Tandem card, which doesn’t charge fees and has a perfect exchange rate, start charging interest immediately on the withdrawal, rather than at the end of the billing cycle, like with purchases.
But, what’s wrong with paying interest?
When you pay interest on your spending on a credit card, you’re basically paying to borrow the money and pay back the cost of your spending over a period of time. The downside to this is that you’ll have to pay back more than you borrowed and your purchase will ultimately be more expensive. Say you buy a £30 Christmas day gift on a credit card with a 24.99% APR, if you pay back within the interest free period (usually the same month, but check with your provider) you’ll pay £30 for it. However, if you only pay the minimum and are charged interest, that Christmas present may now cost you £37.50. The higher the interest rate on the card and the longer it takes for you to pay off the balance, the more interest you will pay and the higher the cost of purchasing that item.
Conclusion:
While some people have a fear of any credit products, it is important to understand that there are good forms and bad forms of debt. Paying off your student loan with a credit card is a terrible idea. Getting a 5 year personal loan for a temporary cashflow problem one month is also a pretty bad idea. Using a credit card to even out spending peaks can be a way of effectively using a credit card to borrow at zero interest. As long as you follow the steps above, this can be an effective way to borrow and use credit to unlock value.
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