How to Use Credit Cards and Never Pay a Penny in Interest

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  • Credit cards offer perks like cash back on purchases.
  • But if you lose money to interest charges, you'll negate those benefits.
  • Set a spending limit and create a budget to avoid paying interest on your credit cards.

Sticking to one simple rule could save you big time.

Credit cards tend to get a bad rap. And some financial experts, like Dave Ramsey, insist that they should be avoided at all costs.

But the reality is that credit cards can do a lot of good things for you. First, they tend to reward consumers for making purchases in the form of cash back. Secondly, they can come with money-saving perks like free checked bags on flights (a benefit you'll generally find with a travel rewards card).

Also, credit cards can actually help you build credit. If you pay your bills on time, that positive activity will go on your credit report, potentially leading to a higher credit score. And the higher that number, the less expensive it generally becomes for you to borrow.

But while credit cards can work to consumers' advantage, they come with one major drawback. If you don't pay your balance in full by its due date, you'll risk accruing interest on your purchases -- interest that costs you money.

The good news, though, is that it's possible to use credit cards regularly without paying a cent of interest. All you need to do is this one thing.

Set your own spending limit

When you get a credit card, it will generally come with a spending limit based on a formula its issuer will use. That formula will take factors like your income and credit score into account.

But the spending limit you get on your credit cards may not be the spending limit your monthly paychecks can support. And so if you want to avoid a scenario where you've racked up a balance you can't pay in full, crunch some numbers to see how much you can afford to charge each month on your credit cards.

It may be that you have three separate credit cards, each with a $2,500 limit. But that doesn't mean you can afford $7,500 in charges every month. Heck, you may not even be able to afford to max out just one of those three cards. So rather than rely on your credit cards' spending limits, set your own.

Budgeting will help

The best way to see how much you can afford to charge on your credit cards is to put yourself on a budget. Once you've accounted for expenses like rent and car payments, which generally get debited from your checking account, you'll see how much you can afford to spend on other bills, whether it's cable, groceries, or social activities. That should help you set a spending limit that will make it so you're able to pay off your credit card balances in full every month, thereby avoiding interest charges.

Another good bet? Give yourself a buffer for unplanned bills. You might do your number-crunching and find that you can swing $2,000 in credit card charges a month without having to carry a balance. But you may want to shave $200 or $300 off of that limit to give yourself a cushion for unexpected things like car repairs or higher-than-anticipated utility bills.

Paying interest on your credit cards is basically like throwing money away. But if you're careful about setting a spending limit for yourself, you might benefit from credit cards for years without paying any interest on your purchases at all.

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