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How to use a credit card without paying credit card interest rates

There’s something exciting about visiting another city and experiencing a different culture. So, several years ago, I started using a national credit card that rewards me with bonus miles for airline travel when I make purchases. While the bonus miles are a great feature, if you’re unable to pay off the full balance each month, the high Annual Percentage Rate (APR) is less than thrilling.

Credit CardsBut, I learned a while back that there’s a way to get the bonus miles and avoid the high interest rates charged for carryover balances. Don’t believe me? Here’s how.

Step 1:  Pay off the balance each month

But, wait…didn’t you just say that this was going to apply to carryover balances? Yes, I did. Allow me to explain.

My credit card provider permits me to enroll for auto-pay. So on the due date, the credit card company charges my bank account for the full balance owing on my credit card. This way, I never pay the credit card company’s high APR.

Yes, but couldn’t that overdraw your account? Technically, yes. But, not exactly.

Step 2:  Pair your bank account with a personal line of credit

At the bank, I have a BankLine that provides me with a ready line of credit. A line of credit is—in some regards—similar to a loan, except that you only pay for what you use. So, if you don’t use it, you don’t pay for it. While CNB doesn’t do this, some banks charge an annual fee for a personal line of credit, so that’s something to consider before setting up your own.

The APR for my BankLine is Wall Street Journal Prime plus 2% floating daily. So, as of today, the APR is 5.25%. This is significantly lower than the 18% APR that many credit card companies charge.

If my checking account balance is not enough to cover the credit card payment, BankLine automatically transfers funds to my checking account in increments of $100. For example, if my account needs $1,783, BankLine will transfer $1,800. And, BankLine will continue to transfer funds so long as I don’t exceed my BankLine limit.

How do I actively manage my personal line of credit?

For me, BankLine is a partner with my checking account. When I receive my e-statement each month, the activity on my BankLine is displayed on the statement. I manage BankLine online as I do my other bank accounts. Using CNB’s online banking, CentraNet, I transfer funds from BankLine to my checking account, or transfer funds from my checking account to BankLine.

I like to pay BankLine in full each month, but in months when I am not able to pay in full, BankLine automatically draws a monthly payment from my checking account. The monthly payment, both principal and interest, is 3% of the BankLine balance with a minimum of $20.

There are no fees. The only thing I pay is simple interest on the outstanding balance. And, as I mentioned earlier, as of today, the Annual Percentage Rate is 5.25%. So, if my BankLine balance was $1,000, the interest I would owe is $52.50.

BankLine Inquiry

Why aren’t personal lines of credit more widely used?

Some people have a hard time accepting a personal line of credit because they are accustomed to high interest rates and fees on this kind of service. They assume there is catch or a hidden fee. But, that is simply not the case.

So, if you’re interested in setting up your own personal line of credit, I’d encourage you to take the next step and contact your bank.

About the Author:

Bill Nesbitt is the chief executive officer and chairman of Central National Bank.

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Posted in Banking, Personal Finance