How do interest-free days work on credit cards?

If you’re looking to get a credit card, you may have noticed that many cards offer an interest-free period on purchases. So what does this actually mean, and how can you avoid getting stung by interest charges?

What is an interest-free period for a credit card?

The interest-free period is the maximum number of days you won’t be charged interest on any purchases you’ve made with the credit card, provided you pay off your balance in full by the due date.

This interest-free period can be from 0 up to 62 days, according to the list of credit cards on Canstar’s database. The most popular (74%) is for up to 55 days.

Not all purchases on a credit card qualify for an interest-free period. Credit card companies usually charge interest on cash advances (e.g. withdrawing cash from an ATM using your credit card) from the date of the transaction.

A common misconception of the interest-free period is that the full period duration applies from the time each purchase is made.

For example, if the interest-free period is up to 55 days, thinking you will have 55 days to pay off each purchase before interest will be charged. But this isn’t the case. The key wording here is “up to”, it’s not 55 days for each purchase.

The interest-free period actually refers to the maximum number of interest-free days that are available on a purchase you make with the card.

The interest-free period typically starts on the first day of your statement period, which is usually monthly or every 30 days. To get the full 55 days interest-free (including the day of the purchase) in our example, a purchase would need to be made on the first day of your statement period.

The first day of the statement period could be the first day of the calendar month, or the monthly anniversary of the date you took out the card. Check your credit card statement for these dates and to confirm when your statement period starts and ends.

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.

For example, let’s assume that you have a credit card with up to 55 days interest-free and a statement cycle that runs from the 1st to the 30th day of a 30-day month.

In this example, you purchase a new refrigerator for $1,000 using your card and don’t buy anything else with it. We 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: 55

Since your purchase was made on the first day of the statement period, you would receive the full benefit of the credit card’s 55-day interest-free period.

If you don’t make the full payment by the due date – i.e. the 55th day after the start of the statement period, with the start date counting as the first day – you would forfeit the interest-free period and be charged interest on the remaining balance from after the due date.

Purchase made on day 15

Total number of interest-free days: 40

Since the purchase was made on day 15 of the statement period, you would actually only get 40 days interest-free.  As before, if you did not pay the balance in full by the due date, you would incur interest charges on the remaining balance.

Purchase made on day 30

Total number of interest-free days: 25

The purchase is made on the final day of the statement period, so you have only 25 days to pay the closing balance in full.

If you had the option, you may want to delay this purchase by one day so that it occurs on the first day of the new statement period – and you would receive your full 55 days interest-free (assuming you paid your existing closing balance on or before the current due date). This would give you more time to pay off the purchase before the next due date.

What happens if I don’t repay my credit card closing balance in full?

If you don’t repay your closing balance in full by the due date – for example, if you just make the minimum repayment – you’ll lose the interest-free period. You’ll then be charged interest on your outstanding balance from after the due date.

You can get back the benefit of the interest-free period by repaying in full your closing balance by the due date each month.

How do I avoid credit card interest charges?

The only way to make sure you’re not charged interest each month is to pay the closing balance in full on or before the due date. That’s regardless of whether you use your credit card for large one-off purchases, such as a new fridge, or for those smaller everyday purchases, such as your daily coffee. The closing balance and the due date will be clearly marked on your statement each month.

You might want to consider setting a reminder in your calendar each month so you don’t forget to make the payment.

It may also be worth checking with your bank if it’s possible to set up an automatic payment from your bank account or home loan offset account (if you have one) to clear your credit card balance each statement period.

Some other steps you could take to reduce or eliminate credit card interest include:

• Pay more than the minimum repayment – every extra dollar will reduce your monthly interest bill.
• If you have an overdue balance, pay it off as soon as you can. Interest is typically calculated on a daily basis on the outstanding balance on a credit card. This means the sooner you repay your balance, the less interest you’ll be charged.
• Try to make bigger purchases towards the start of the statement period so you have more time to pay them off before the due date.
• Consider a credit card with a balance transfer offer. Transferring your balance to another card at a lower rate for a period of time (perhaps even 0%) may give you some breathing space to reduce and eliminate the debt. However, keep in mind that these offers are often only for a short time and there could be a higher interest rate to pay after the offer expires. Plus, you still need to pay off the balance.

If you’re finding it difficult to manage your credit card repayments, you should contact your bank or credit card company to see what options may be available to you.

You can also get free, independent and confidential advice from a financial counsellor, or you can contact the National Debt Helpline on 1800 007 007.

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