When you pay with cash and own outright, you don’t have to worry about creditors repossessing your stuff. But since cash only goes so far, sometimes we use credit to get the things we want and need. Whether you’re getting an auto loan, a mortgage, a student loan or a credit card, the privilege of using a bank’s money to buy now and pay later comes with a price—and it’s called interest.
Paying interest to a bank sucks, especially when you calculate how much it costs to carry debt over several months or years. It is what it is. And unfortunately, it doesn’t look like interest is going away anytime soon. However, there are ways to stop interest from eating at your hard-earned money.
1. Transfer credit card balances to a 0% interest card
If you plan on paying off your credit card over the next six to 18 months, transfer your balance to a credit card that offers a 0% introductory rate and avoid interest while paying off the balance.
As long as you can pay off the card within the introductory rate period, you won’t pay a penny in interest and you could potentially save hundreds. If you have a credit card with a $3,000 balance and you’re currently paying 17% interest, switching to a 0% credit card could save you $400 over 18 months.
2. Pay off credit cards in full every month
Avoiding credit cards is one way to prevent costly debt, but keep in mind that credit cards are only as bad as your worst habits. Some people are convinced that credit cards are the biggest scam banks use to keep us in debt so they can make money. It’s true that the more we owe and longer we carry a balance the more our banks profit off us. But if truth be told, a bank can’t make us carry balances from month-to-month or buy things we can’t afford. This is a choice we make.
Using a credit card has its benefits, such as the ability to build or improve your credit, and if you have a rewards credit card, you can accumulate reward points redeemable for discounts on travel, merchandise and gift cards. The trick to using a credit card is paying off your balances in full every month—period. Not only can you avoid long-term debt, you avoid interest and it’ll be as if you’re paying with cash.
3. Increase your mortgage payment
Mortgage rates are at historic lows. But despite getting a low rate on your mortgage loan, you can still end up paying way more than the actual sale price of your home once you calculate interest payments. For example, we recently purchased a new house two months ago, and based on our mortgage paperwork, at the end of our 30-year term, we would have paid an extra $200,000 in interest charges.
There’s no way to completely avoid interest when buying a home, but you can save and pay less interest over time. By making one extra principal payment a year or increasing each mortgage payment by 1/12, you can lower the amount of interest you pay over the life of the loan. As a bonus, you’ll also payoff the home years soon and build equity faster. We’ve set a goal of making one additional principal payment each year. If we can stick with this plan, we’ll save $100,000 in interest payments.
4. Get 0% financing for a car loan
An excellent credit history can help you qualify for 0% auto financing for up to 36 to 72 months. This can make a new car purchase more affordable and help you save thousands over an auto loan term. Not every auto financing company offers this promotion, but companies that have offered this deal in the past include Toyota, Mazda, Cadillac and Honda. The only downside is that 0% financing typically only applies to new models, which means you can’t take advantage of this promotion if you’re buying a used car.
5. Make frequent monthly payments
Most people only think about their creditors once a month when their bills are due. But if you develop a pattern of paying your creditors on a weekly or biweekly schedule, you’ll pay less interest. This is because interest accrues based on a daily average. When you increase the frequency of payments throughout the month, this decreases your daily average and you owe less interest. Let’s say your credit card bill is due on the 2nd of the month and you make a $50 minimum payment. What you can do is break up the payment and pay half during the preceding month on the 15th and the other half on the 30th before your due date.
I believe in saving money and I hate throwing money away on interest. But I also realize that paying interest is often the only means to buying a house or car. We can’t always get around paying a bank its fee, but at least we have a measure of control over how much we pay.
Do you use credit to buy the things you want or do you pay in cash?