How to Avoid Finance Charges on a Credit Card

Finance charges represent the cost of borrowing money on a credit card. Understanding these charges and how they apply is a significant step toward managing credit card accounts effectively and avoiding unnecessary expenses. This article provides guidance on various strategies to prevent these charges from accruing on credit card balances.

Understanding Finance Charges

Finance charges are the interest levied on an unpaid credit card balance. This interest is the price paid to the card issuer for borrowing money. These charges accrue when a balance remains unpaid beyond a specific period.

The Annual Percentage Rate (APR) is the yearly rate of interest charged on outstanding credit card balances. Most credit card issuers calculate finance charges using the average daily balance method. This involves summing the outstanding balance for each day in the billing cycle and dividing by the number of days in that cycle to determine the average amount subject to interest.

Finance charges differ from other credit card fees. Examples include late payment fees, assessed when payment is not received by the due date, or annual fees, a recurring charge for holding certain cards. Finance charges specifically relate to interest on the borrowed principal.

Leveraging the Grace Period

A credit card grace period is a timeframe during which interest is not charged on new purchases. This period extends from the end of a billing cycle to the payment due date. To benefit from this grace period, the entire statement balance from the previous billing cycle must be paid in full before the current due date.

Paying only the minimum amount due or a portion of the balance results in finance charges being applied to the remaining balance. For example, if your billing cycle ends on the 15th and your payment is due on the 10th of the following month, you generally have approximately 25 days to pay without interest.

If a cardholder carries a balance from one billing cycle to the next, the grace period is lost. New purchases may begin accruing interest immediately from the transaction date. To re-establish the grace period, the cardholder must pay off the entire outstanding balance, including any accrued interest, for at least one full billing cycle.

Strategic Payment Approaches

Avoiding finance charges requires a proactive approach to managing credit card payments. One effective strategy is to set up automatic payments for the full statement balance each month. This ensures the entire amount is paid by the due date, preserving the grace period and preventing interest from accruing. Many card issuers allow cardholders to schedule these payments directly through their online portals or mobile applications.

Making multiple payments throughout the billing cycle can reduce the average daily balance. This is advantageous if the grace period is lost, as it minimizes the principal amount subject to interest. For instance, paying off a large purchase soon after it posts can reduce the balance earlier. Regularly monitoring credit card statements and due dates is also important.

Reviewing statements as soon as they are available helps identify discrepancies and reminds the cardholder of the payment due date. If paying the full statement balance is not feasible, pay as much as possible above the minimum payment. While finance charges will still apply, reducing the principal balance results in lower overall interest charges in subsequent billing cycles.

Utilizing Promotional Offers

Credit card companies provide promotional offers that can temporarily help avoid finance charges. A common offer is a 0% introductory Annual Percentage Rate (APR) on new purchases. For a specified period, from six to twenty-one months, no interest will be charged on purchases made with the card.

Understand the terms of these offers and pay off the entire balance before the promotional period concludes. If a balance remains after the 0% APR period expires, the standard, often higher, APR will apply to the remaining amount. Some cards, particularly deferred interest retail store cards, may charge all accrued interest from the original purchase date if the balance is not paid in full by the end of the promotional period.

Balance transfer offers provide a temporary reprieve from finance charges. These promotions allow cardholders to move high-interest debt from one credit card to another with a 0% introductory APR for a set duration, twelve to eighteen months. A balance transfer fee, 3% to 5% of the transferred amount, is assessed for this service. Plan to pay off the transferred balance before the promotional rate ends to avoid interest charges once the standard APR applies.