How do interest-free days work on credit cards?

Finance Journalist · 20 November 2020
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?

In this article:

What is an interest-free period?

Most credit cards offer an interest-free period on purchases. This is the maximum number of days that you won’t be charged interest on purchases, provided you pay off your balance in full by the due date. Interest-free periods are usually up to 44 or 55 days, but there are credit cards in Canstar’s database with interest-free periods as long as 110 days.

There are a small number of credit cards in Canstar’s database that currently have no interest-free days on purchases – so interest is charged on all purchases, regardless of whether or not the balance is paid in full each month. Some types of transactions also do not typically come with an interest-free period. For example, 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 is that 55 days “interest-free” means you will have 55 days to pay off each card purchase before interest will be charged. However, this won’t be the case for all purchases. 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. Interest-free periods typically start on the first day of your statement period. To get the full 55 days interest-free (including the day of the purchase), 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, for example. Check your credit card statement for these dates and to confirm when your statement period starts and ends.

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 are evenly spaced through the month.

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. As a hypothetical example, let’s 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 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: 44

In this scenario, since your purchase was made on the first day of the statement period, you would receive the full benefit of the credit card’s 44-day interest-free period. Be aware that if you didn’t make the full payment by the due date – i.e. the 44th 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 would be charged interest from after the due date until the closing balance (plus the interest) is paid in full.

Interest-free period

Purchase made on day 14

Total number of interest-free days: 30

Since the purchase was made on day 14 of the statement period, in this scenario you would actually only get 30 days “interest-free”.  As before, if you did not pay the balance in full by the due date, you would incur interest charges.

Interest-free periodPurchase 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, 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 44 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.

Interest-free period

What happens if you don’t repay your 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 to avoid late fees), you will lose the interest-free period and you will be charged interest on your outstanding balance from after the due date until you repay the balance in full. You can get back the benefit of the interest-free period by fully repaying your closing balance by the due date each month.

How to avoid credit card interest charges

Regardless of whether you use your credit card for large one-off purchases, such as a new fridge, or if you prefer to put a few smaller everyday purchases on your credit card, such as your electricity bill to your daily coffee, there is only one way to ensure you are not charged interest each month: pay the closing balance on or before the due date.

The closing balance and the due date will be clearly marked on your statement each month.

Consider setting up 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:

  • Making 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 will 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% p.a.) may give you some breathing space to reduce and eliminate the debt. However, it’s not something to jump into without carefully weighing up the pros and cons. For example, many balance transfer card providers charge fees to switch over, and if you can’t repay your balance within the promotional period, you may end up paying more in interest.

If you are finding it difficult to manage your credit card repayments, contact your bank or credit card company to see what your options are. You can also get free, independent and confidential advice from a financial counsellor. You can contact the National Debt Helpline on 1800 007 007.

Cover image source: Zivica Kerkez (Shutterstock).

This article was originally written by James Slack. It was reviewed by our Sub Editor Tom Letts and Finance Editor Sean Callery before it was updated, as part of our fact checking process.

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