I Asked ChatGPT To Explain How Credit Card Interest Works—and How To Avoid Paying It
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Written by
Harrison Pierce
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Edited by
Amen Oyiboke-Osifo
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Reviewed by
Jasmin Baron
No one wants to pay interest on their credit cards. Day-to-day expenses are already high, so you don’t need to worry about factoring in interest charges. I asked ChatGPT to explain how credit card interest works and to provide steps on how to avoid paying it.
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Keep in mind that you shouldn’t unquestioningly trust what ChatGPT says; however, it can be a helpful starting point when learning about complex topics like credit card interest. Here’s what you need to know.
What Is Credit Card Interest?
You are charged credit card interest when you don’t pay your full credit card balance by the due date. For example, if you charge $1,000 to your card during your statement period, and you pay $600 by the due date, you will be charged interest on the remaining $400.
Your interest rate is an annual percentage rate (APR), and most credit cards have variable APRs. That means they can change based on several factors. There are typically different APRs for various types of transactions, including a cash advance APR, a penalty APR, a balance transfer APR and a standard purchase APR.
As long as you pay your full statement balance by the due date, you don’t have to worry about interest charges. If your goal is to maximize credit card rewards, paying interest can cut into your earnings.
How Is Credit Card Interest Calculated?
Although interest is shown as an annual percentage rate, it’s calculated daily. So, you’ll divide your APR by 365 to find the daily interest rate. Next, you calculate your average daily balance. Using your statement, find out the total balance for each day in the billing cycle and divide it by the number of days.
Finally, multiply your average daily balance by your daily interest rate, then multiply that value by the number of days in the statement period. Now you know the total amount of interest you’ll need to pay. Note that this can change if interest is compounded, but it shouldn’t be too significant.
Here’s an example:
- APR: 20%
- Daily interest rate: 20% ÷ 365 = 0.0548%
- Average daily balance: $1,000
- Monthly interest: $1,000 × 0.0548% × 30 = $16.44
How To Avoid Paying Interest
Carrying a balance on your credit card can be very costly. If you want to avoid paying interest, here’s what you need to know.
Pay Your Balance in Full
The most effective way to avoid paying credit card interest is not to carry a balance. Pay your statement balance in full each month by the due date, and you’ll never be charged interest.
You will see something on your bill labeled “minimum payment.” Keep in mind that this is the minimum amount required to avoid a late fee. If you only make the minimum payment, you’ll still be charged interest on the remaining balance. Although you can technically use cash-back rewards or points to help cover your monthly payment, it generally won’t provide the best value.
Take Advantage of Low Intro APR Offers
If you know a big purchase is coming up, consider applying for a credit card with a 0% intro APR offer on purchases. Some of the best low-APR credit cards offer extended intro APR periods of up to two years. Be sure to review the details of the offer to determine the timeframe. If you don’t pay off your balance in full by the end of the offer, you will be charged interest on any remaining balance.
If you are currently paying credit card interest, you can also apply for a card with 0% APR offer on balance transfers. You’ll pay a small balance transfer fee (typically 3% to 5%), and then you can make payments on the balance over time without paying interest. Balance transfer cards with long introductory periods might not offer the most comprehensive credit card perks, but they are worth considering if you are paying interest each month.
Spread Out Large Purchases
A billing cycle is typically around a month (28 to 31 days). When the billing cycle ends, you receive your statement balance, and then you have around three weeks to pay the balance.
If you need to make a large purchase, time it for right after your billing cycle ends. You’ll be at the start of a new billing cycle, so you’ll have approximately two months before the payment is due, after which interest will begin to accrue.
Request a Lower Interest Rate
It never hurts to call your credit card company and request a lower interest rate. If you’ve been a loyal customer, you can explain your current financial situation and why you can’t pay off your balance in full. The issuer might be willing to work with you to lower your rate or help you develop a payment plan that involves less interest.
Bottom Line
Calculating your credit card interest can be tricky, so it’s best to avoid paying it entirely. As a general rule of thumb, only make purchases that you can afford to pay off immediately. If you have a large purchase, consider taking advantage of a 0% intro APR offer and paying off the balance before the offer expires. ChatGPT can be a helpful resource for brainstorming ideas, but be sure to consult a financial planner for personalized guidance tailored to your specific needs.
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