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Does Your Credit Card’s Interest Rate Matter?

Credit Card Basics, Credit Cards
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Credit cards are one of the most expensive ways to borrow money. That’s because the interest rates can be very high — 30% a year or more. But if you’re careful with your spending, you can have a credit card with the highest annual percentage rate in the world and never pay a penny in interest.

If you pay in full every month: APR doesn’t matter

When you pay your credit card balance in full and on time in a given month, two things happen that make your interest rate irrelevant:

  • There’s no carried-over balance on which the card issuer can charge interest.
  • You get a grace period on purchases in the next month. That means interest won’t accrue on new purchases until your next statement due date passes.

When you don’t pay your balance in full, your issuer will charge interest on whatever balance you carry over. In addition, interest can start accruing on new purchases from the day you make them.

All you have to do to avoid interest charges, then, is pay your bill in full every single month by the due date. That’s it. Don’t carry a balance, and you won’t pay interest.

Nerdy tip

Credit card issuers aren’t required by law to offer a grace period for those who pay in full, but all good issuers do. Some issuers that specialize in credit cards for bad credit don’t offer a grace period. It’s best to avoid these issuers’ products. If you have bad credit, see NerdWallet’s best credit cards for bad credit for better options.

If you don’t pay in full every month: APR matters a lot

If you carry a balance — meaning you don’t pay in full — you’ll rack up interest charges. Credit cards charge interest based on your average daily balance, so every day you’re carrying a balance on your card figures into the amount of interest you’re charged for the month.

When you carry a balance for a month, a year or five years, those daily balances can add up to a whole lot of interest. Our interest calculator gives you a sense of how much it can cost you:

Two things to keep in mind:

MAKE THAT MINIMUM PAYMENT

Even if you can’t pay your balance in full, it’s crucial to make at least the minimum payment on time. If you don’t, you’ll probably be charged a late fee, and your credit score could suffer. Stop paying entirely, even for a couple of months, and your card issuer might lower your credit limit. This creates a cascade effect. You miss payments, and your credit score suffers. Your credit limit is lowered, so your balance looks higher relative to your available credit, and your credit score suffers even more.

So make your minimum payments at all costs. That signals to the card issuer that you’re still here, and you’re still taking responsibility for your debts.

PAY EARLY AND OFTEN

Let’s say the due date has come and gone. You made at least the minimum payment on time, so you’re in good shape there. But you don’t need to wait until the next due date to take another stab at paying down your balance, or paying it in full. As soon as you have the money, you can make another payment to wipe out all or part of your debt. You’ll still pay interest, but the charges will be lower because you will have reduced your average daily balance for the month.

» MORE: How is credit card interest calculated?

If you need to carry a balance

Since credit card interest can be so expensive, look for ways to lower your interest if you’re expecting to keep that debt around for a while. Balance transfer cards are a great option if you have good credit. Usually, you’ll start with a promotional 0% APR period during which you’ll pay no interest at all on balance transfers. That gives you anywhere from 12 to 21 months, depending on the card, to pay off your balance before the interest ramps up again.

Usually, though, you’ll pay a balance transfer fee of 3% or more when you move your balance over to the new card. There are just a handful of cards from big-name issuers that don’t charge balance transfer fees, or you can try a credit union.

If you can’t qualify for a 0% APR credit card or you need more time to pay things off, look for a credit card with a low ongoing interest rate or consider applying for a personal loan.

If you don’t need to carry a balance

Now that you know that your APR means nothing unless you carry a balance, you can focus on a credit card’s other costs and benefits when you look at the options. Our credit card tool can help you compare offers by evaluating factors such as annual fees, reward rates and more.

Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email: virginia@nerdwallet.com. Twitter: @vcmcguire.
Updated April 4, 2017.