Access to credit can open up a whole world of opportunity. You can cover everyday purchases like gas and groceries and rest easy when unplanned expenses pop up. Credit cards can temporarily cushion even the big-ticket items you want but don’t always have the upfront cash for. The keyword here, though, is temporarily.
When used responsibly, credit cards are powerful tools for earning rewards, handling emergencies and, of course, building credit. But while your credit card might look just like your debit, spending beyond your means can get you into trouble, especially when it comes to missed bill payments and surprise interest charges.
Before we get into how to avoid these charges, it’s essential to understand how credit works.
How credit works
When you use your credit card to make a purchase, you’re borrowing money from your provider. Since it’s technically money that you don’t own, your credit limit acts as a short term loan. You can charge up to your credit limit, but you need to pay back the balance to your credit card company each billing cycle.
If you miss a payment, you will be charged interest on your balance. This means the purchases you make can end up costing you more than you originally thought or planned. See the 5 things that impact your credit score to get a firmer grasp on your credit.
When should you pay off your credit card to avoid interest charges?
Although every card is different, most cards have a grace period of at least 21 days. Whether it’s a bank or other financial institution, your credit issuer will provide you with a billing statement before your grace period ends. This way, you can pay your bill without generating interest on your purchases.
As long as you pay off the total amount listed on your billing statement before the end of the grace period, you won’t be charged interest. There are some cases where the grace period won’t apply, like if you already carried a balance on your card at the beginning of the billing cycle or if you took out a cash advance.
Is it bad to pay off your credit card balance right away?
There are many myths around when you should pay off your credit card bill: should you do it the instant you receive your bill statement? At the beginning of the month? Or how about after every purchase you make?
The truth is it doesn’t really matter when you pay your bill - just as long as you do it before the due date, which marks the end of the grace period for any given billing cycle. You should always aim to pay off your balance in full each month, as carrying a balance will only end up costing you interest in the long run.
In some cases, like if you are building credit, it may serve you to let your balance statement reflect your utilization rate each month, as long as you pay the statement balance on time, every time. But if it’s easier for you to remember to pay your card off immediately as you make purchases, you shouldn’t have to worry about the chances of a missed payment and the subsequent interest charges.
Practicing healthy spending habits go a long way to help you avoid interest and paying off your credit card. We’ve rounded up five tips that make paying off your credit card a bit easier.
5 tips for paying off your credit card and avoiding interest charges
1. Pay more than the minimum (if you can’t pay in full)
The bottom line is to pay off your balance each month, but sometimes circumstances change and it isn’t always possible to pay down the full amount. If you are actively paying down credit card debts, try to pay more than just the minimum amount. This will help you get out of debt more quickly, and it will also reduce the amount of interest you get charged overtime.
2. Spend smarter
There are plenty of ways you can use your credit card strategically. Using your credit card at businesses and online brands that offer cashback rewards is a great way to reduce your credit card bill, especially when you earn cashback on your everyday spending for groceries, gas, dining, and more.
3. Avoid cash advances & balance transfers
Cash advances and balance transfers shouldn’t be taken lightly. Not only do cash advances carry a higher interest rate than credit cards, but they also do not have a grace period. This means interest is charged as soon as you make a withdrawal. Fast cash like advances should be reserved for emergencies only when paper money is required, but not available.
Similarly, balance transfers will charge interest on the total amount of money being transferred. Interest begins to accumulate immediately. Depending on the total amount that is transferred, the interest rate, and any other associated fees, these charges can add up quickly.
4. Practice optimal utilization
Utilization–the amount of credit you’ve used out of your available limit–is not only useful for building your credit, but it’s also good practice for keeping your credit card statement low and bills manageable. Keeping your utilization between 10-30% is the ideal utilization range for building credit, and using this to guide your spending should also keep your bill low and easy to pay off.
5. Treat your credit card like your debit card
Another great way to avoid paying interest is to make sure you never spend more than you can pay-off. Don’t charge credit for what you don’t have. If you use your credit card as a debit, you can avoid interest charges and debt while reaping the benefits of rewards like cashback earnings and points.
How Neo makes it easy to avoid interest charges
At Neo, we’ve made it easy for you to understand your credit card bill, and that includes notifying you when your bill is due so that you don’t get surprised by interest charges. We also empower you with real-time data, helping you understand your spending habits and take control of your financial future.
Sign up today for the Neo Card, and start earning instant cashback rewards when you shop at your favourite local stores and national brands.