It is never a good decision to spend more than your repayment capacity via credit card as it can sweep you into a debt trap. And, getting out of the debt trap might be time-consuming and costly as you may end up paying interest ranging anywhere between 18 percent and 47.88 percent per year on outstanding credit card balance.
Here are six ways to avoid paying interest on credit cards:
Meet the due date
Financial institutions do not usually charge any interest if you pay your credit card bill by due date and hence, you must try to clear outstanding dues by due date. Late payment of credit card bills can be dangerous in two ways. Firstly, your credit score gets adversely affected, and secondly, you pay late payment fee along with finance charges every time you miss your credit card payment date.
While card issuers give an option to make minimum balance payment which is 5 percent of your outstanding balance due, opting for this is not recommended as it makes you pay huge interest. You must go for this option only during emergency situations.
Plan your big ticket expenses well
The time span between credit card transaction and due date of its payment is known as interest-free period. For instance, suppose your credit card has an interest free period of 50 days, and you make a purchase via your card on the 8th day of the billing cycle, then you can enjoy the next 42 days as interest free period on the purchase. However, if you buy via your card on the 30th day of your billing cycle, then the next 20 days will be your interest free period.
Interest free period goes up to 55 days. Purchases via credit card do not attract finance charges during this period. Hence, you must plan bigger purchases in such a way that you avail maximum interest-free period on the same. Moreover, to avail this benefit your outstanding balance must be nil.
Avoid withdrawing cash from ATM
Withdrawing cash using credit card from ATM can shoot up your credit card bill as card issuers usually charge cash advance fee ranging between 2 percent and 3.5 percent on the amount withdrawn. Interest is charged from the day you make the withdrawal to the day you make full payment of the bill along with cash advance fees.
Hence, avoid withdrawing cash from ATM if you do not want debt to mount up on your credit card.
Avoid using credit cards abroad
If you swipe credit cards abroad, you need to make the payment in the currency of the country for which the conversion charge is applied. For making international transactions, the conversion or mark-up charge can go up to 3.5 percent of the transaction value. Therefore, it is recommended to use forex cards for making payment overseas as the card comes with no transaction fees.
Avoid unnecessary purchases
Splurging on conspicuous consumption lands you into debt trap. Expenditure via credit card should not be at the cost of your financial stability. Financial imbalance might lead to a delay in making credit card bill payment which indeed makes you vulnerable to finance charges and late payment fee. Therefore, avoid spending unnecessarily if it is out of your budget.
Limit the number of credit cards you own
It doesn’t matter how appealing credit cards appear, prudent use can keep you on a safety boat. Else, you might drown financially with no one to assist you out of the situation. If you genuinely require more than one credit card, it is recommended to go for two credit cards at maximum – one for daily spends and another one for emergency situations.
Credit card can be construed as a cost-effective way to maintain your cash flow if you can avoid finance charges. Follow the above ways and make sure you check your monthly credit card statement to keep track of your finance charges and establish the best way to keep your credit card’s cost low.
Sahil Arora is business head, Payment Products at Paisabazaar.com.
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First Published: IST