Maybe thinking about your credit card interest rate and how your bill gets tallied up at the end of each month seems far too complicated to try and understand. Or you may think you know all there is to know about credit card interest, and rest easy knowing that you’ve got 55 days interest-free. Either way, you may be surprised.
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What are interest-free days?
Credit and charge cards are usually advertised as coming with a certain number of interest-free days – usually either 44 or 55 days interest-free, but sometimes as high as 62. There are also credit cards that have no interest-free days – so interest is charged on all purchases, regardless of whether or not the balance is paid in full each month.
A common misconception is that 55 days “interest-free” means that you will have 55 days to pay off a card purchase before any interest will be charged. However; 55 days interest-free refers to the maximum number of interest-free days that are available on a purchase. To attain the full 55 days interest-free, a purchase would need to be made on the first day of your statement period. This could be the first day of the calendar month, or the monthly anniversary date on which you took out the card (check your credit card statement for these dates).
Some issuers will also allow you to align your statement cycle to your own preferred dates. For example, if your home loan repayment was due on the 15th of each month, and you are paid fortnightly, you might prefer your credit card balance to be due on the 30th of the month, so that your two (possibly) biggest expenses were evenly spaced through the month.
Let us examine in more detail exactly how the interest-free period works and what your 55 days interest-free really means.
How does a credit card interest-free period work?
The length of the interest-free period on an individual credit card purchase will depend on which day of your statement period the purchase is made on. We will assume that you have a credit card with 44 days interest-free and a statement cycle that runs from the 1st to the 30th day of the month.
We will also assume you purchase a new refrigerator for $1,000 and take a look at three different scenarios – the purchase being made at the start, middle, or end of the statement period.
Purchase made on day 1
Total number of interest-free days: 44
In this scenario, since your purchase was made on the first day of the statement period, you receive the full benefit of your 44 day interest-free period. Be aware though, that if the full payment is not made on the due date, you will forfeit the interest-free period and be charged interest from day 1 until the closing balance is paid in full. These charges will usually appear on the 30th day of the next statement cycle.
Purchase made on day 14
Total number of interest-free days: 30
Since the purchase was made halfway through the statement period, in this scenario you actually only get 30 true days “interest-free”. As before, if you do not pay the balance in full on the 44th day, you will incur interest charges.
Purchase made on day 30
Total number of interest-free days: 14
In this final scenario, the purchase is made on the final day of the statement period – which results in only 14 days to pay the closing balance in full. If you had the option, it would make sense to delay this purchase by one day so that it occurred on the first day of the new statement period – and you would receive your full 44 days interest-free (assuming you paid the closing balance on or before the due date).
Avoiding credit card interest charges
Regardless of whether you use your credit card for large one-off purchases such as a new refrigerator or if you put all your everyday purchases through your credit card from your electricity bill to your daily coffee, there is only one way to ensure that you are not charged interest each month:
Pay the closing balance on or before the due date.
Both of these bits of information (the closing balance, and the due date) are clearly marked on your statement each month.
Consider setting up a direct debit from your bank account or home loan offset account so that you can’t forget to make the payment.
Who does it differently?
Surprisingly, not every bank is the same when it comes to the way in which interest is calculated when the closing balance is not paid in full. In all three of the above scenarios, if the closing balance was not paid in full, interest would be calculated from the day that the purchase was made. Another way to think of this is that all interest-free days for that month are forfeited if the balance is not paid.
This practice; however, is not universal. A different approach is that of Bendigo Bank, which issues a number of credit cards with either 44 or 55 days interest-free. Bendigo Bank says on their website:
“Because of when and how we charge interest, you could save up to 50% in monthly interest charges by banking with us – even if the rate is the same on a card from another bank.”
Taking a closer look, the reason that the method used by Bendigo Bank could save you money is that if the closing balance is not paid in full, they only calculated interest charges from the date the statement was issued – rather than the date that the purchase was made.
Using the example of the $1,000 refrigerator, let us assume a 17% p.a. interest rate and that the purchase was not paid off until the 50th day (6 days past the due date). The first scenario uses the method by which most issuers charge interest and the second uses Bendigo Bank’s method. We will ignore any late fees that might have been charged for not paying the balance on the due date. Even if you cannot pay the credit card balance in full, you should always make the minimum payment for that month to avoid late fees, among other fees that come with credit cards.
Total interest charged: $23.29
Total interest charged: $9.31
Regardless of the length of your credit card’s interest-free period, or the method used to calculate interest, there are steps you can take to reduce or eliminate credit card interest:
- Always make more than the minimum repayment – every extra dollar will reduce your monthly interest bill.
- If you have an outstanding balance, don’t wait until the due date to make extra repayments. Making payments thorough the month will reduce the average daily balance of your card (this is the balance on which the interest calculations are based).
- Consider a balance transfer. Transferring your balance to another card at a lower rate for a period of time (perhaps even 0% p.a.) will allow you some breathing space to reduce and eliminate the debt. It’s not something to jump into without carefully weighing up the pros and cons though.
If you don’t actually have a credit card yet and are just in the research stage for now, we can help you with that! Use our credit card comparison tool to find the perfect credit card, and the perfect interest-free period, for you. We have also provided a comparison table below which provides a snapshot of the current low rate credit cards on offer which have over 45 days interest free. These products have been sorted by purchase rate (lowest to highest) and are based on a monthly spend of $2,000, with links direct to the providers’ website.