Does Freezing Your Credit Card Stop Interest?
Does freezing your credit card stop interest? Understand what credit freezes really do and proven ways to manage your card debt.
Many individuals wonder if freezing a credit card stops interest from accruing on existing balances. Understanding the distinct functions of credit card freezes and how interest is calculated is essential to address this misconception and explore strategies for reducing interest charges.
How Credit Card Interest Works
Credit card interest represents the cost of borrowing money, expressed as an Annual Percentage Rate (APR). Most credit cards feature a variable APR that fluctuates based on an index like the prime rate. Interest charges accrue if a balance is carried from one billing cycle to the next without being paid in full.
Interest is calculated using the average daily balance method. This involves determining the card’s outstanding balance each day of the billing period, adding new charges, and subtracting payments. The daily balance is then multiplied by a daily periodic rate, which is the APR divided by 365. This daily interest is added to the balance, leading to compounding, where interest is charged on previously accrued interest.
What Credit Card Freezes Really Do
The term “freezing a credit card” refers to two distinct actions, neither of which stops interest from accruing on existing balances. The first is a credit security freeze, placed with the three major credit bureaus: Experian, Equifax, and TransUnion. Its primary purpose is to prevent new credit accounts from being opened in your name. This helps protect against identity theft by restricting access to your credit report for new credit applications. This type of freeze does not impact your existing credit card accounts or the interest charged on their outstanding balances.
The second type of “freeze” is a temporary card block or lock, usually initiated through your credit card issuer. This action prevents new purchases or transactions from being made on a specific existing card. It is often used if a card is misplaced or to control spending. While it effectively stops new spending on that particular card, it has no effect on the interest that continues to accrue on any balance you already owe. Recurring bills or subscriptions linked to the card may still process even with a temporary block.
Strategies to Reduce Credit Card Interest
Since freezing a credit card does not stop interest, other strategies are necessary to reduce or eliminate these charges. The most direct approach is to pay the credit card balance in full each month. If the entire statement balance is paid by the due date, interest charges on new purchases can be avoided. Making payments more frequently than once a month can also help, as interest is calculated on the average daily balance, so a lower average balance means less interest.
Transferring high-interest debt to a balance transfer credit card with a 0% introductory Annual Percentage Rate (APR) can provide a period to pay down the principal without accruing interest. These introductory periods typically range from 6 to 21 months. A balance transfer fee, usually 3% to 5% of the transferred amount, is often charged, but the savings from avoiding interest can frequently outweigh this fee.
Alternatively, a debt consolidation loan can combine multiple credit card balances into a single loan with a fixed, potentially lower, interest rate. These personal loans often have APRs ranging from about 6% to 36%, depending on creditworthiness, and offer a structured repayment plan.