Avoiding Credit Card Interest

Here is some information about how interest works and how you can reduce or avoid credit card interest altogether.

Realize card accounts are loans

A credit card is essentially a loan. Every time you use the card for a purchase, or to get cash from an ATM, for an overdraft advance on your checking, or make a transfer in Online Banking, you are borrowing money. As with other loans, you'll pay interest for money you use for as long as you use it. Credit card interest is also called "Finance Charges".

Understand the four main types of credit card transactions

Transactions on a credit card fall into four main categories:

• Purchases – This is where you use the card or card number to buy merchandise or services from a merchant. This could be in a store or restaurant, over the internet, or through the mail.
• Cash Advances – This is where you use your card to withdraw money directly from your credit card. This can be done from a teller or ATM, a transfer out of your account by phone or by Online Banking, or Easy Touch Telephone Teller.
• Finance Charges (Credit Card Interest) – This is the interest you pay each month on the amount of money you've used each day.
• Fees – At DCU, fees are interest charges you would incur if you pay your bill late or for charging more than your credit limit allows. Please note that there is a cost associated for rush replacement of a lost card. DCU does not charge for many fees that other institutions may impose such as an annual fee, a fee for every cash advance, an ATM free, and other fees.

Make sure payments arrive on or ahead of the due date

DCU credit card interest rates and those of most card issuers are based on your credit history. If you consistently pay your bills on or ahead of time, you will be rewarded with a good credit score. A good credit score will qualify you for lower interest rates and will ultimately save you a lot of money. However, paying your bill late or less than the minimum amount due will cost you in fees, can result in an increase in your credit card interest rate and even drop your credit score.

Understand the use of the grace period on purchases

A credit card is a very convenient way to buy things and it is safer than carrying cash.

When you make purchases during the billing cycle, we give you until the payment due date to pay the balance down to zero before we begin charging interest on the money you've used. If you do that every month, you're getting at least 25 days of use of that money for free.

Many members have two DCU credit card accounts. They use one card for smaller purchases that they pay off before each month interest-free. They use the other card for bigger purchases that they want to spread out repayment over two or more months.

Reduce credit card interest by reducing your balance

If you don't pay off your balance in full each month, you will start paying interest. The only way to reduce the amount of credit card interest you pay is to reduce the balance (or principal) on which we calculate interest. Here are some tips...

• Make more than the minimum payment – Making more than the minimum payment will pay down your balance faster and will reduce the amount of interest you'll pay each month so pay as much as you can afford to help get that balance down to zero. Every now and then however, you may have unexpected high expenses in a given month so we make our minimum payments as low as possible so that those times can be less of a hardship.
• Budget for a monthly payment and stick to it – The more you can afford to pay each month, the faster you'll reduce the principal and thereby the amount of interest each month.
• Consider paying off old purchases before making new ones – If circumstances allow, consider paying off each major purchase you make before you make the next one. This will help you keep your credit card balance under control.

Stop interest after a cash advance by bringing your entire Visa balance to zero

A cash advance is a direct personal loan from your credit card. It works similarly to a home equity line of credit. The interest starts being charged as soon as the money leaves the account.

When you make a payment, your money pays off what you owe in a specific order. The payment has to pay each of these items in full first before moving onto the next. This is why it can be difficult to put a dent in a large credit card balance.

Because of this order, the simplest way to stop interest on a cash advance is to pay enough to bring your Visa balance to zero. Simply log into Online Banking and check that the new Visa balance displayed is zero after you make your payment.

The best possible value

At DCU, we try to bring you the most convenient, competitive credit card programs possible. Use them well and they can make your financial life easier and contribute to your financial well-being.