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How to Save on Credit Card Interest

From reducing your expenses to paying your card off in full each month, there are a few ways in which you can pay less interest on your credit cards.

April 19, 2021

A credit card can be a powerful financial tool that provides much-needed funds when you’re in a pinch. But the high interest rate that comes along with the card might make you think twice before you charge your next big purchase.

Currently, the average credit card APR hovers around 14.65%. At that rate, a $5,000 credit balance paid off over 60 months would accrue $2,083 in interest.

You probably have better uses for your money — whether it’s saving up for kids’ college funds or squirreling away money for a rainy day. So if you’re wondering how to save on interest, there are impactful ways to reduce or eliminate your credit card interest.

Here’s how.

What is Credit Card Interest?

Banking is a business. And lending money is risky.

To willingly take on the risk of lending out funds, banks and private lenders need compensation. This is where interest comes in. Also referred to as the annual percentage rate (APR), interest is the cost of borrowing money from your credit card company or financial institution.

When you purchase a product or service on your credit card, your lender pays the merchant on your behalf, upfront. Later, your lender sends you the bill in the form of credit card payments. If you pay your balance on time and in full, you won’t owe any interest. However, if you can’t cover the balance by the due date, it will carry over to the next billing cycle, along with the accrued interest on the remaining balance.

This revolving balance is the primary source of credit card interest. Therefore, if your goal is to save money on interest, start with the revolving line of credit. You can lower the amount of interest you’re charged by simply paying down more of the total balance and ensuring that payments are sent before the due date.

But this isn’t the only reason why you may be charged interest on your card. Depending on your credit card company, you may also be charged on balance transfers and cash advances.

How Does Credit Card Interest Work?

A credit card interest rate is not universal. Each rate is assigned according to risk. The less confident a lender is in your ability to pay off your debts in a timely manner, the higher the credit card interest rate they’ll charge.

According to the Consumer Financial Protection Bureau:

“The credit card company may decide which interest rate to charge you based on your application and your credit history. … Credit card companies typically offer their best rates to customers who have the highest credit scores.”

Your credit score is a metric that judges your past credit activity on a scale of 300 to 850. This figure is based on five key metrics, according to the FICO® credit score model:

  1. Payment history – Your financial history is the record of all your past payments and whether they were paid on time or past due.

  2. Amounts owed – Credit utilization ratio is the ratio of how much of your available credit you’re using at a given time.

  3. Credit history length – This metric gauges how long you’ve held credit accounts. An established track record of taking out credit and repaying credit card debt may help to instill confidence.

  4. Credit mix – Credit card companies want to see a portfolio of credit accounts. They may prefer you to have a mixture of credit products like car loans, mortgages or other credit cards.

  5. New credit – This considers the number of credit inquiries lenders have made into your account and the number of new accounts you’ve recently opened. Too much activity may give creditors pause for concern.

Interest Rates by Credit Score

According to The Bureau of Consumer Financial Protection’s "The Consumer Credit Card Market 2019 Report," consumers with credit scores on the high end of the range pay the lowest effective interest rates:

  • Deep Subprime (579 or less) – 21% effective interest rate

  • Subprime (580 to 619) – 20.5% effective interest rate

  • Near Prime (620 to 659) – 19% effective interest rate

  • Prime (660 to 719) – 16.5% effective interest rate

  • Super Prime (720 or higher) – 13.5% effective interest rate

A 7% difference may not seem like a lot. But when you run the numbers, it can represent thousands of dollars saved.

Quick example: Let’s consider a $5,000 loan. Paying the minimum amount over 60 months at a 21% APR would accrue $3,128 in interest. Paying the minimum amount over 60 months at 13.5% APR would accrue $1,904 in interest.

That’s over $1,000 difference in interest on a relatively small loan.

Now imagine how much larger that number would be on a $50,000 line of credit. Put simply, taking steps to improve your credit score will help you save on credit card interest.

How Can I Pay Less Interest On My Credit Card?

Aside from working to improve your credit score, there are a few actions you can take to pay less interest on a credit card, including:

  • Paying off your card each month (if possible) – If you manage to pay off your balance in full and on time every month, there won’t be any interest payments. However, as a borrower, this may not always be a feasible option.

  • Making frequent payments – If you’re carrying a balance, you can make multiple payments per month. Since credit card interest accrues on your average daily balance (ADB), more frequent payments will reduce that ADB and its total interest.

  • Reducing your expenses – If you can’t afford to pay off your credit card each month, look for places to spend less and save more. Although some payments are unavoidable, there may also be extraneous purchases you can skip for the month.

  • Using a credit card management app – Do you have several credit cards that carry a balance? Managing multiple payments and finding the fastest and smartest way to pay down debt can be a challenge. A credit card management application, such as Tally, can help you easily manage all your cards, centralize your debt, create a custom payoff plan and then set an automated monthly payment plan. And if you qualify for Tally*, you can receive a line of credit to use to pay down your credit cards and help get you out of credit card debt.

    *To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.9% - 25.9% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.

How Much Should I Pay on My Credit Card to Avoid Interest?

If you want to avoid interest altogether, you’ll need to pay off the entire credit card balance before your grace period ends. If you don’t, the remaining balance will accrue interest.


How much interest? You can calculate your credit card interest by following these three steps:

  1. Convert annual interest rate to daily interest rate – Take your APR and divide it by 365 days.

  2. Calculate your average daily balance – Look at your statement’s billing period and write down the balance for each day. Once that’s done, total them up, and then divide by the number of days in the billing period to get your average daily balance.

  3. Add it up – Multiply your average daily balance by the daily rate. Then, multiply that figure by the number of days in the billing period to get your credit card interest.

If you wish to avoid the math, there are online credit interest calculators that can simplify the process.

Can Credit Card Companies Lower Your Interest Rate?

They can. However, will they? That depends on a number of factors.

Your credit card interest rate isn’t necessarily set in stone. It’s negotiable — to a degree — especially if you have a long history with the company and come prepared with information on what their competitors may be offering.

Credit card companies don’t want to lose you as a customer. They may be willing to match a competitor’s rate.

How flexible they are with your rate will also likely be impacted by your credit score. The higher the number, the better the chances that they’ll accept an interest rate reduction.

Can I Write Off Credit Card Interest?

There’s a chance you may also be wondering whether you can take a tax deduction on personal credit card interest.

In the past, practically all types of consumer interest were deductible. But the Tax Reform Act of 1986 put a stop to this. The bill eliminated several tax shelters while also forbidding tax deductions for consumer loans except for mortgages.

So in summary, no, you can’t write off credit card interest on personal cards.

However, if you’re a small business owner or self-employed, you may be able to write off interest for business expenses, even if you use your personal card. Common small business tax deductions include:

  • Advertising and promotions.

  • Business meals.

  • Business insurance.

  • Business credit card interest and bank fees.

  • Business vehicle usage.

  • Contract labor.

  • Depreciation.

  • Education.

  • Home office.

  • Interest.

  • Legal and professional fees.

  • Moving expenses.

  • Rent expenses.

  • Salaries and benefits.

  • Telephone and internet.

  • Travel expenses.

  • Personal expenses.

Tally: How to Save Money on Interest

A credit card can be a lifesaver when you’re tight on funds. However, if you don’t pay off your balance in time, the interest rates can be a major headache and cash drain. Getting on a plan to manage your credit card debt can help you meet your financial goals in the future.

Evaluating your fiscal situation, setting a budget and then paying off your existing balance will help you save money on interest. Chipping away at a balance isn’t an easy feat. But it is possible, especially if you have the right tools.

This is where Tally comes in. Tally is an automated debt manager that can help you pay off your credit card debt quickly and efficiently while helping to save you money on interest.

Want to see how Tally can help you save money and get out of debt? Start saving today.

Disclosure: To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.9% - 25.9% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.