In the world of credit cards, there are two types of consumers: those who pay their bills in full every month and those who don’t. Those who carry a balance from month to month, known as “revolvers,” end up paying interest on that balance.
When you carry a balance on your credit card, you pay a lot more for your purchases. That terrific new HDTV you purchased on sale during the holidays? If you’re still paying for it months later, it’s no longer a good deal.
Savvy credit card users know how to avoid paying interest expense on purchases. They make it a habit to pay their credit card balance in full during the so-called “grace period.”
What is a grace period?
A grace period is the amount of time you have to pay your balance in full before interest kicks in. You’ll find the number of days you have for a grace period in the terms and conditions for your credit card. The amount of time varies by issuer, but it’s usually between 21 and 25 days.
Here’s an example: Let’s say you have a credit card with a 16 percent APR and a 23-day grace period. On the first day of the month, you spend $100 on new clothes. If you pay that $100 in full before the 23rd day of that same month, you do not have to pay interest. In effect, you receive an interest-free loan for the new clothes.
However, if you only pay $50, you’ll pay 16 percent interest on the remaining balance. When the balance is small, it doesn’t sound like a big deal. But once you start carrying a balance and it keeps growing, things can get ugly in a hurry.
(Click here to learn four ways you can help lower your credit card interest rate.)
How compound interest works
When it comes to a savings account, compound interest is a wonderful thing. But with a credit card balance, it’s downright scary.
When you carry a balance, you end up paying interest on the interest. In other words, your balance just keeps getting bigger because you begin paying interest on a balance that includes the previously accrued interest. If you only make minimum payments, it becomes more and more difficult to pay off the balance.
Being a revolver on rare occasions is understandable. Sometimes, life throws a curve ball. You might need a new dishwasher or have a car that suddenly needs major repairs. But if you make a practice of carrying a balance, it can lead to all kinds of trouble.
How to minimize the damage if you’re carrying a balance
The first thing you need to do is stop using your credit cards. At this point, your objective is to pay off your balance to minimize the amount of interest you’ll have to pay.
If you have a good credit score, you might qualify for a balance transfer card with a zero percent APR introductory offer. These types of introductory offers are for a specified amount of time, usually between six months and 18 months. During that time, you can pay off (or at least pay down) your debt without paying interest.
If your credit score is too low for you to qualify for a balance transfer card, take a look at your budget and cash flow. Eliminate or reduce as many expenses as you can, and throw every extra dollar you find at your debt. If you only make the minimum payment every month, you will be in debt for quite a while.
If you have debt on multiple cards, save as much money as you can by making a list of your balances starting with the highest interest rates. Then begin at the top of your list and pay as much as you can toward the balance with the highest rate while making minimum payments on the other balances. When that debt is paid off, move to the next balance on your list.
All credit cards are not created equal
Unfortunately, there are some credit cards out there that don’t offer a grace period at all. This means that as soon as your purchase is posted to your account, the interest clock starts ticking. Usually, credit cards that don’t offer a grace period target consumers with bad credit. With these cards, it’s nearly impossible to escape paying interest and so they should be avoided.
However, most major credit card issuers do offer grace periods. To confirm that your card is one of them, be sure to always read the fine print.
Beverly Harzog is a nationally recognized credit card expert, consumer advocate, and the author of Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She runs a popular credit card blog on her website, www.BeverlyHarzog.com.
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