Although credit cards allow you to buy things you may not have the money for right now, they don’t come without their drawbacks. One of these drawbacks is finance charges. A finance charge is the interest that accrues on the balance you carry on your credit card. Before you choose a credit card, it’s important to know how the issuer calculates your finance charge so that you don’t get into credit card debt.
Avoid Finance Charges on Your Credit Card
- Pay your balance in full: By paying your balance in full every month, your credit card will not issue a finance charge to your account. A grace period lets you avoid finance charges if you pay your balance in full before the due date. The grace period is typically between 21 to 25 days. You can find it on the front or back of your billing statement. Without a grace period, the card issuer may impose a finance charge from the date you use your card or the date each transaction is posted to your account. In addition, if you only pay part of your balance, then your next billing statement will have a finance charge based on the unpaid balance and any new purchases you make. Create a budgeting worksheet to help you manage your finances so you can pay your balance in full.
- Use a low-interest credit card: Aim to minimize your interest charges by using a low-interest credit card. Several credit cards offer a 0% introductory interest rate to entice new customers. However, once the promotional period ends, any remaining balance will start accruing finance charges at the regular APR. You can also be assessed a finance charge on balances that aren’t subject to the promotional rate. You should always read the terms of your offer so you don’t have to pay several months of finance charges once the promo period ends.
- Avoid balance transfers and cash advances: Balance transfers and cash advances don’t have a grace period. This means that finance charges start accruing once the balance hits your card. There are exceptions, such as when your credit card has a 0% interest rate promotion. These exclusions rarely apply to cash advances.
The more you understand about credit cards, the better you will be able to pay off credit card debt and avoid added charges. By reading the terms and conditions of your credit card, you may be able to avoid finance charges based on the timing and amount of your credit card payment.