Do you ever look at your credit card statement and wonder what that “interest saving balance” thing is all about? You’re not alone! Credit card interest can be confusing, but understanding how it works is an important step in saving money.
In this guide, we’ll break down interest saving balances, how credit card interest really works, and tips to stop paying so much in fees. I’ll also explain how interest can work in your favor with savings accounts and the power of compound interest.
Buckle up, friend—you’re about to become a credit card interest expert!
How Credit Card Interest Works
Before we dive into interest saving balances specifically, let’s review some Credit Card Interest 101.
Each credit card has an APR, or annual percentage rate. This is the interest rate you’ll pay on any balances you carry from month to month. APRs often range from around 15% to 25% depending on your credit.
As you use your credit card to make purchases, interest starts accumulating immediately on those transactions. But you typically have a grace period where you can avoid paying interest on new purchases. As long as you pay your statement balance in full by the due date, you won’t be charged interest on those new transactions.
Your statement balance is the total amount you owe at the end of your billing cycle. It’s the full balance except for any new purchases you made since the statement closed.
The key is that statement balance does NOT include brand new charges made after the closing date. Those new purchases will be included on the next statement.
This distinction between statement balance and total balance is where that confusing “interest saving balance” comes into play.
Understanding Your Monthly Statement
Your credit card statement has a lot going on, but let’s break down the key parts:
- Statement balance – Total amount owed on previous purchases at statement closing date
- Minimum payment – The minimum amount you must pay by the due date
- Interest saving balance – Statement balance plus new charges since statement closed
To avoid interest, you must pay the statement balance in full each month. But if you spent more after the statement date, you’ll see that interest saving balance reflected as well.
Paying this full interest saving balance is the only way to avoid interest both on your previous statement balance and any new purchases you made after the statement cut-off.
If you pay anything less than the full interest saving balance, you will be charged interest on both the statement balance and new transactions.
What is My Chase Plan?
If you have a Chase credit card, you may have noticed the My Chase Plan feature. This allows you to pay off large purchases over a fixed term for a monthly fee instead of interest.
For example, let’s say you spent $3,000 on a new TV. Rather than paying interest on that large balance, My Chase Plan lets you split it into smaller predictable monthly payments, like $250 a month for 12 months.
The fee is a fixed percentage of the total purchase amount based on the plan length. This can end up being cheaper than racking up interest month after month.
My Chase Plan balances show up separately on your statement, and don’t impact your interest saving balance. You still have to pay the plan fee along with your minimum payment, though.
Should You Pay the Minimum or Full Balance?
When that credit card bill arrives, you have options on how much to pay. While it may be tempting to just pay the minimum, that will cost you more in interest over time.
The minimum payment is a percentage of your total balance, usually around 2-3%. Banks set a minimum payment so that some amount is paid each month to reduce balances gradually.
However, paying only the minimum keeps balances high, which means more interest fees. It also takes much longer to pay off the full amount owed.
To avoid interest and fees, you should always strive to pay your statement balance in full each month. But if that’s not possible, paying even a little over the minimum can make a difference.
Let’s say your minimum payment is $50, but your statement balance is $1,000. If you pay $75 instead, that extra $25 goes directly toward reducing your principal. This will save on interest next month.
Paying more than the full statement balance can make sense too if you added new charges after the statement date. You’d pay the full interest saving balance to avoid interest on both old and new transactions.
How Much Does Credit Card Interest Really Cost?
We all know credit card interest rates are high, often 15% or more. But you may not realize just how much extra interest can cost you over time due to compounding.
Let’s say you have a $5,000 balance on a card with 18% APR. If you only paid the minimum due each month, it would take over 17 years to pay off the balance! And you would end up paying $6,764 in interest based on daily compounding.
Now imagine you put a $1,000 expense on a credit card charging 25% interest and only paid the minimum due. Even if your minimum payments were $50 a month, it would still take almost 2 years to pay off that $1,000 purchase. And you would pay $298 in interest!
The more interest that accrues each month, the more your balance grows. Then interest compounds on that higher balance, which turns into a downward spiral.
Paying more than the minimum due will save a ton of money in the long run by cutting down interest fees. Prioritizing high-interest debt can speed up payoff times too.
Interest Saving Tips for Credit Cards
Managing credit card interest can feel overwhelming, but these tips will help you spend less on fees:
Pay your statement balance in full each month – This avoids interest on new purchases and keeps balances low. Set payment reminders to avoid late fees.
Consider lower APR balance transfer cards – Transferring high-interest balances to a 0% intro APR card saves a ton on interest while you pay down debt.
Reduce balances and limit new charges – Funnel extra cash into paying down cards and only charge essential purchases. Slow usage drops interest costs.
Negotiate for a lower APR – You can call your credit card company and request a lower ongoing interest rate. It works more often than you’d think!
Consolidate debt with a personal loan – Personal loans have fixed rates as low as 5%, which can save on interest compared to credit cards.
Leverage 0% APR periods – Some cards offer 0% interest for 12-18 months on new purchases and balance transfers. Use these intro periods wisely!
How Interest Works on Savings Accounts
So credit card interest can seriously drain your wallet. But did you know you can leverage interest to your advantage with savings accounts?
With savings accounts, banks pay you interest simply for keeping money on deposit with them. They’re able to lend out your deposits to earn higher interest from loans.
Interest rates on savings are stated as APY (annual percentage yield). The national average APY is currently around 0.06%. But top high-yield savings accounts can offer up to 5% APY or more.
APY reflects the effects of compound interest. This is where you earn interest not just on your initial principal, but also the interest itself.
For example, let’s say you have $5,000 in an account earning 1% APY paid monthly. In the first month, you’d earn $4.17 in interest. Then in month two, your account balance would be $5,004.17 so your interest payout would be slightly higher.
With compounding, your money snowballs. You earn interest on interest, exponentially growing your savings over time.
The Power of Compound Interest
The concept of compound interest was popularized in Benjamin Franklin’s famous quote: “Money makes money. And the money that money makes, makes money.” Here’s a quick example to illustrate:
Let’s say you deposit $10,000 into a savings account with a 5% interest rate, compounded annually.
- In year 1, you earn 5% interest on your $10,000, which is $500. Your balance grows to $10,500.
- In year 2, you earn 5% interest on the $10,500 balance, which is $525. Your new balance is $11,025.
- In year 3, you earn 5% on $11,025, which is $551. Now your balance is up to $11,576.
Notice how you earn more interest each year because the balance grows. After 10 years, your $10,000 would nearly double to $19,671 thanks to the power of compound interest!
This shows why starting to save early is so important. Your money can really grow exponentially over decades in the workforce due to compounding.
Opening a High-Yield Savings Account
If you want to leverage interest for your savings, opening a high-yield savings account is a great move. Here are some tips:
- Shop around online for the highest APY rates from banks
- Look for accounts with no monthly fees or minimum balance rules
- Make sure interest compounds daily rather than monthly or quarterly
- Choose a bank with great mobile app and customer service
- Set up automatic recurring transfers from checking to savings
Online banks tend to offer the very best rates since they have lower overhead. Some top options include Marcus, Capital One, and American Express.
A high-yield savings account is the perfect place to build up a rainy day fund. Saving consistently allows compound interest to work its magic. Before you know it, you’ll have a nice emergency cushion.
We covered a lot of ground on how interest can work both for and against you with credit cards and savings accounts. The key takeaways are:
- Pay your full credit card statement balance each month to avoid interest on purchases
- Compound interest causes balances to snowball, so pay more than minimums
- With savings accounts, compound interest accelerates your deposit growth over time
- Leverage high-yield accounts to maximize interest earnings on your nest egg
Hopefully you now understand exactly what an interest saving balance is and how you can optimize interest for your unique situation. Use this knowledge to make smart money moves that save you cash and grow your wealth. Happy saving!