Understanding your credit card’s ‘interest free’ period

Interest free. It’s a lovely concept, and sounds great when you put some numbers in front of it.

But there’s fine print that means your ‘interest free’ period actually isn’t as free as you think. Depending on what time of the month you used your card, or whether you meet certain criteria, you may only get a few days interest free, or even none at all.

What we’re talking about

First, it’s important to define what we’re talking about. We’re covering the ‘up to XX days interest free’ claim, usually a period of around 30 to 55 days, but varies depending on the card.

We’re NOT talking about introductory periods, like 3-6 months interest free balance transfer periods or 3-6 months interest free on purchases. Those are fairly well defined. It’s the XX days interest free that has the traps.

How interest free really works

The first thing to know is that your interest free period – whether it’s 30, 44, or 55 days – doesn’t start when you make your purchase. It starts at a set point, like the first of the month, and also doesn’t apply to ‘cash advances’, or withdrawals of cash from an ATM or the like.

From that start date, the clock is ticking. For example, let’s assume it’s 1 July. If you had an interest free period of “up to 44 days”, you have until 14 August to pay off any and all purchases you made during your ‘statement period’ of 1-31 July.

If you pay that period off, perfect – you’ll pay no interest (other than on cash advances) and you’ll sail into the next month knowing you’ve got another 44 days interest free coming.

What happens if I don’t pay off the full balance?

This is where it starts getting rough. Not only will you pay interest on the outstanding balance, you also forfeit the interest free period for the next statement month.

So, if you hadn’t paid off your full balance from July, not only would you pay interest on whatever remains, you’d also start paying interest immediately on any and all purchases you make in August. And then it snowballs – if you don’t pay the full balance of July and August by 14 September, you continue to lose your interest free periods until the whole balance is paid.

Surely I should just not use a credit card, then?

It’s easy to see how people get swamped by credit card debt, but that doesn’t mean you shouldn’t have one. It’s just incredibly important to be careful with them.

Using your credit card and paying off the bill entirely can have a huge boost to your credit score, making it a very valuable tool if you use it correctly. It can get you lower interest rates for other kinds of borrowing, like home, vehicle or personal loans. You just need to be careful.

How to ensure you get those 44 (plus or minus) days interest free

To make the most of your card, only make purchases you know you can pay off instantly (or close to). Your credit limit is NOT free money. It’s a loan that, if paid in full, on time, has no interest. If not paid off in full and on time, it becomes a liability that’s costing you money.

If you have to make a ‘big’ purchase, do it at the start of your statement period, and ensure you pay it off before your interest free days end. If possible, set up an automatic payment to clear your full balance automatically, so you never forget to pay it off and get charged.

What if I already have credit card debt I’m paying interest on?

If you’re paying interest, you need to clear it and fast, so you won’t pay more and more in fees. There are three things you can do:

• If you can afford it, pay it off, in full, straight away
  
  
• If the debt’s too large to pay in full, try and get a balance transfer card and put the whole balance/majority on it. If there’s anything left on the original card, focus on paying that first. Once your old card is clear, pay the balance transfer one off before the interest free/low interest period ends. If there’s still debt left, try and transfer it to another balance transfer card and continue until it’s clear. If you do it this way, you can avoid most or all the interest charges
  
  
• If you can’t get a balance transfer, look at a consolidation loan. Make sure you find one that has a lower interest rate than your credit card. Once you clear your card, don’t use it until you’ve paid off your consolidated loan, otherwise, you might start paying interest on two forms of debt
  

Looking for a consolidation loan?

We can help you there. As an independent body, we negotiate on your behalf with the major banks, finding you the best deal at the lowest rate. We’ve secured consolidation loans that start at 6.95% p.a., likely much lower than a credit card’s interest.

If you’d like to learn more, check out our consolidation loan page.

This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular loans or insurance policy. Information on the website does not consider your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans. Find out more about The Lending People and how we may be able to help you.