The Best Way to Avoid Credit Card Interest Fees! - MFTM (2024)

How the average American can save $1,155 a year by not paying credit card interest rate fees! Here’s how!

Author: Kari Lorz – Certified Financial Education Instructor

Check yo’ self! Yeah, you heard me! Let’s check your interest rates on your credit cards! Time to PARTY!

No party? Oh, okay. Uh, where was I?

Interest rates can kill you, albeit a slow and quiet death, but very painful once you notice them. These are the fees that you pay to the credit card company for the pleasure of borrowing their money (aka using credit). You rack up fees by not paying your balance off in full every month. According to CreditCards.com, ” The percentage of Americans who pay their credit card bill in full rose 1.5 percentage points to a record high of 33.7%.” That’s a whole lot of us are paying A LOT of money in interest.

Wouldn’t it be nice to avoid that? Today, I’m walking you through how to avoid credit card interest so you can keep that money safe in your bank account!

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What is the CARD Act of 2009?

The American debt crisis was on the rise, so much so that the government had to come in and tell lenders they had to state certain painful information on your monthly statements. This information wasn’t obvious, and so many didn’t understand the credit process, that many Americans didn’t even realize they were being hung out to dry by their lenders. So the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 was signed in by President Obama.

There were 12 protections, and if you want to read all about the act, then click here for a good

Today let’s talk just about interest rates. Now, thanks to the act, credit card companies have to tell you how long it will take to pay off your card, and how much interest you will accrue if you only pay the minimum payment. Apparently, we as consumers weren’t paying that much attention to credit card fees before 2009.

According to NerdWallet, the average American in 2020 had $6,741 in credit card debt, and with this type of revolving debt they paid $1,155 in credit card fees – just on interest! Yet, the $6,741 figure is the average, knowing that some households pay off their debt every month, then the average of those that do carry debt from month to month the average is $15,210 of debt.

I sure could find a good use for $1,155 a year, could you?!?

Let’s look at some numbers

For example, my family’s last month’s credit card balance was for $3,068. If I made only the minimum payment (and didn’t charge another cent), it would take us 18 years to pay it off, with a 16.15% APR. OMG! That $3,068 bill would end up costing us $6,666, that’s crazy! Umm… no coincidence that the total amount we’d end up paying is the devil’s number! (Ha, ha our childhood learnings don’t ever really leave us, do they?). Seriously, it was exactly that dollar amount, I couldn’t make something this perfect of an example up!

Here’s a screenshot of my credit card bill payoff call-out box…

On the back sheet of your bill, there should be a small line item or box, it will tell you how much money you’ve paid in interest fee charges for the year. Are you ready to look at it? (gulp).

What is a normal credit card interest rate?

As of June 2021, the average credit card APR, (annual percentage rate) is 16.13%. While they range from 14.14% up to 26% for some store cards, that’s a huge range, which can have a dramatic impact on how much you will pay to use other people’s money to buy things.

Some experts say that the more bells & whiles (aka rewards) your card has, then the higher the rate. Yet, one thing that EVERYONE agrees on is that store only (aka Best Buy card or a Target REDcard) are the worst kind of cards to have, in regards to their interest rates. You are much better off with a regular Visa, Mastercard, etc.

I just looked at my Target card, it’s a 25.15% interest rate. Ummm… no thanks. I’ll pass.

Go look at your statement and see what your APR is, and see what the company tells you about how long it will take to pay it off, and how much you will owe on it if you only pay the minimums. If you have multiple cards, maybe now is a good time to use the one that has the lower APR on it.

What can influence my credit card’s interest rate?

The Prime rate

“It’s one of the most important rates when it comes to borrowing money… It’s usually the lowest interest rate anyone could qualify for. The U.S. prime rate is the national prime rate as published by the Wall Street Journal, which calculated based on the prime rates from the nation’s largest banks. The U.S. prime rate is usually about 3% higher than the federal funds rate.” (source)

This rate affects your credit cards because the credit card issuer bases their interest rate off of the prime rate (for variable rate cards, which most are). If the Prime rate goes up, then so does your interest rate.

Your FICO rating

Schools over, but did you know that you still get graded? The bad part is that nobody proactively tells you this. Many younger people may not even know about this. You need to be the one to look up your credit report and your FICO score on your own. If you want to get started right now check out this page for your best options.

The article from Experian states that those with a Poor credit rating “may be required to pay a fee or deposit and that they may not be approved at all.” At the other end of the spectrum, “those with an Excellent rating at the top of the list for the best rates from vendors.”

What is interesting is that they also stated that “of those with a Good rating, only 8% of applicants are likely to become delinquent in the future.” That’s why they charge more for those who are likely to default on payment, they are covering their losses.

Essentially, the higher your FICO score, the lower your interest rates will be.

However, you need to know that your score is impacting by your credit report. Yes, your credit report and your credit score are two different and distinct things. Yet your report influences your score.

You can get each of your credit reports from this trusted site. There are three credit bureaus, Experian, Equifax, and TransUnion. You can get a report for free from each of them every year. It’s a good idea to pull one of each if you’ve never pulled your report, as you want to be sure the info on each is correct and the same. From then on out you should pull your report from any of the three bureaus, at minimum once a year.

Back to your credit score, essentially, the higher your FICO score, the lower your interest rates will be. With too low of a score, you probably won’t be approved for credit cards with great rates. Your score can also impact your housing (some apartments pull reports to see if you are a trustworthy tenet (aka will you actually pay the rent).

There is also the Vantage score, very similar to the FICO score. However, it was only developed in 2006. So it hasn’t gained enough steam for people to pay too much attention to it right now. But you never know what will happen in the future.

How to get your credit score for free

How to get your free Vantage Score

Both Credit Karma and Credit Sesame offer you insight into your credit reports and credit scores, but they both give the Vantage Score, not the FICO. Which, if you’ve never looked at your score before this will give you a good general idea of where you’re at.

However, if you want to get started TODAY on figuring out your situation you should definitely start there. It’s a great way to get familiar with the terms, what impacts your credit, and it’s FREE! No credit card required to see your info!

How to get your free FICO score

There are a few places where you can get your FICO score for free, check out this article here on how to do it. Or before you do those options, call your bank and see if they can do it.

Is your credit score really that big of a deal?

Umm… Yes, it is definitely a big deal. Let’s look at a real-life example of how a fair, good, and excellent credit rating impacts the interest rate that you receive, and what that does to how much you pay.

Wallet Hub did a recent review of credit scores and their corresponding interest rates on credit cards, let’s take a look.

• Fair Credit: 22.57% average interest rate
• Good Credit: 20.31% average interest rate
• Excellent Credit: 14.41% average interest rate

If we put these rates into a credit card APR calculator we can see exactly just what your interest does to your actual wallet.

With all three scenarios, let’s assume… $4,000 statement balance, with $100 minimum payment, no new charges on the card and a

• Fair credit at 22.57%:
  • end up paying $3,197 in just interest
  • it would take you five years & 11 months to pay it off

• Good credit 20.31%:
  • end up paying $2,529 in interest
  • it would take you five years & 5 months to pay it off.
  • that’s $668 less than those with fair credit.

• Excellent credit 14.41%:
  • end up paying $1,392 in interest
  • it would take you four years and five months to pay it off.
  • that’s $1,137 less than those with good credit and $1,805 less than those with fair credit.

That’s crazy; you’d end up paying SO MUCH more for the exact same item, all due to one score. Hopefully, this example highlights why having a good credit score is important and exactly how it impacts your interest rate and of course, your money.

How to avoid paying credit card interest fees

With any of the following options, you should also look at improving your credit score. It is absolutely in your own best interest to get this score up and keep it up!

The best way to avoid credit card interest fees

Have none of this matter to you by paying your cards off in full every month! HA! That will show them!

I fully realize that this is an “easy say, hard do” piece of advice. If you are in the position to do this then, by all means, DO IT! If you can’t manage it quite yet, then work off your debt with debt snowball method, (which has a higher probability of success vs. debt avalanche). Work towards decreasing your debt, and then only spending what you can pay off in full that next bill cycle. Again, “easy say, hard do” but this is the goal of how to use credit.

Make partial payments a few times a month

If you can’t pay them off in full every month, and if you get paid bi-weekly, pay some of your bill off with each paycheck. Don’t wait until the billing cycle closes; just pay it now, which reduces your daily accruing interest by decreasing your balance.

Your interest rate or APR (annual percentage rate) is calculated daily (for almost all consumer credit cards), so the less average daily balance = less interest you will pay, that’s why paying a few times a month can be very beneficial.

I used this method for a year or so when I was starting my professional career. As a new Exec, I wasn’t making that much money but had all of the expenses of moving and setting up a new apartment. This was in my spend-happy days, so I wasn’t too concerned with money, but I hated paying any fees.

Call them and ask to lower your interest rate

Yes, call your credit card company now and ask them to lower your interest rate. Wait. Before you do this, find out your FICO score. If you have excellent credit, they should lower your fees. See the chart above for how your FICO score would rate.

The only hiccup is that if you haven’t had the card for longer than a year (some credit companies require 18 months), they may not adjust your rate.

Don’t wait to call until you have credit card problems. It’s best to call when your account is in good standing, and you don’t have any blemishes on your account. If you do have credit problems, then you need to work on fixing your credit and then wait a few months for the good changes to show up on your reports and then call. The three credit bureaus usually only process info once a month, so any changes take time to show up.

Pro Tip: If you have had a late payment fee, and if you haven’t had one before definitely call them and they will waive that fee for you. That should be an easy $25 saved!

Go old school and use all cash

Let’s get honest here, how well do you do with credit cards? When was the last time you went all cash? Did you sign up for a card to get the rewards, but you don’t pay it all off every month? So are you in the positive even with that cashback reward earnings? Analyzing your spending strategy is a good way to see if you have played a bad trick on yourself!

It could be time for a cash-only spending system. Yup, bust out your envelopes and store your weekly cash allowance in there. Once the envelope is empty, then the spending is over.

Many people swear by this method, which was popularized by Dave Ramsey. It’s not fun, but it absolutely works. You can get started with it today, here’s how to get your planner and get to budgeting!

Help, my credit card interest rate is too high!

Remember that great rates right now (June 2021) are around 14.14%, so if you know your credit rating, be prepared that that interest rate is a good starting point for those with excellent credit.

If you find out that your interest rate stinks, and you’ve called them, and they won’t adjust it down for you then definitely check out new credit card companies. NerdWallet has comprehensive reviews on the latest credit cards. You should definitely shop around for a card with a lower interest rate, one that meets your needs and won’t charge you a crazy rate.

Don’t be lured in by tempting rewards programs, though. According to a survey by Bankrate found that 31% of credit card rewards are going unused. (source) So don’t get a card and intend to become a traveler just because a card has an excellent travel rewards program. Get a card for how you actually spend right now!

When in doubt, go for the easy and always popular flat “cash-back” card. (2.5% is a great reward rate). Some cards do 5% back on grocery, or gas, or entertainment purchases for specific months. Yet, it gets complicated, and hard to manage which reward is for which card and for when. If some retailers aren’t coded the right way with their category, then you miss out. (aka ever-popular Target is not classified as grocery, even for Super Targets.)

Credit card tips

1. 0% intro apr credit cards

If you are gearing up for some big purchases, and are responsible with paying within the guidelines, you could look for a card with a 0% introductory APR. This is a card that gives you an interest free period right from the start for a specified time. My husband and I opened one when we got married, and all wedding expenses went on only that credit card. We had 0% for 18 months, a great rate, along with some wiggle room for paying off those larger than normal balances.

Or you can check out a 0% (intro APR) and get a balance transfer credit card, but they will charge a balance transfer fee for this so make sure you do the math to see if it’s worth it. Oh and make sure the card doesn’t have an annual fee as well!

Yet, don’t forget if you don’t pay it all off within the predetermined guidelines the interest rate can skyrocket (think 26% with some cards), and “may include” all the purchases, not just the remaining balance. That’s why you need to read your agreement carefully.

2. Increase your credit limit

You can also help your credit score by asking your current lenders to raise your credit limit. BUT, please only do this if you won’t be then spending more on these cards. With this credit score strategy, you are increasing the amount of credit available to you, which decreases your debt/income ratio, and will raise your score.

3. Start earning more with your credit cards

Have you mastered credit cards, and are a bit bored by how easy they are to manage? Well then, you’ve graduated from your 101 level class and you may be interested in credit card farming! What’s that you ask? Check out #9 on this list. I made $1,000 on it last year with hardly any effort at all!

4. Automate it

The easiest fee you can be charged is a late fee, and no one wants that! Set up your credit card to do an automatic payment for the minimum balance. Yes, you will want to go in and make your monthly payment in full, but if for some reason you don’t get to it in time, you are covered and won’t be charged a late fee.

At the end of the day

Sometimes the boring things are the most important things to look at. In the case of interest rate fees, this is undoubtedly the case. This process shouldn’t take too long for you to do, maybe 10 minutes to check it and process the info that your statement is telling you. Be prepared for a not so nice shock if you are not paying your bills off every month. It’s in your best interest to get this under control now so that you can keep more of your hard-earned money!

Articles related to how to avoid credit card interest:

• learn about credit card farming in my post on creative ways to make money (see #9)
• Worried about using credit cards? See this post to help minimize your risk by freezing your credit!
• Spending Money the Smartest Way Possible (your spending strategy)

Action Item:
Go through each credit card statement and find out your interest rates and the fees paid YTD. Plan future spending on the lowest rate card.