They say the best things in life are free – like a bonus potato cake at the fish n chip shop or even a public holiday. But when it comes to credit cards, what’s “free” about interest-free days?
To understand how they work, let’s first look at what interest actually is.
What is interest?
Credit card interest is a charge for borrowing money from your credit card account. (Yep, the money is not yours; you are simply borrowing it.)
Interest rates differ depending on the type of credit card you have (generally speaking, the more rewards your card has, the higher the interest rate) and the type of purchase you made. For example, most credit cards will likely charge you a higher interest rate when you use your credit card to pull cash out (cash advance) compared to when you use your credit card to pay for a coffee.
Now, this is where interest-free days come in.
Most credit cards offer an interest-free period on purchases – usually up to 44 or 55 days. These are periods in your credit card cycle when you can make purchases without being charged interest on them – so long as you don’t already owe money on your credit card.
Busting the ‘free’ myth.
A very common misconception is that you have 55 days (for example) to pay back every purchase. However, this may not actually be true. You’re more likely to have up to 55 days to pay back the full balance of your credit card.
Still confused? Let’s break it down further.
Let’s look at three scenarios:
- You buy a pair of jeans on the first day of the interest-free period. You now have 54 days to pay the jeans (and any other purchases you make) off in full. If you don’t pay them off in this time you’ll be charged interest on them and it will appear on your next credit card statement.
- You buy a pair of jeans on day 15 of the interest-free period. You only have 40 interest-free days on this purchase and need to pay it off in time; otherwise, you will be charged interest on them.
- You buy a pair of jeans on day 50, you now only have five days left of the interest-free period. If you miss it, you know the drill – you’ll be charged interest on the jeans and any other purchases you make.
Keep the jeans. Beat the interest.
No matter the interest-free period, you have the power to boss your credit card statement. Here’s how:
- Always pay your credit card balance in full every month to avoid being charged interest.
- Set up a direct debit so you never forget to pay your credit card and get stung with late fees and interest.
- Try not to use your credit card to get money out of the ATM, this can be one of the most expensive ways to use your credit card.
- Try and make bigger purchases at the beginning of your billing cycle so you have more time to pay it off.
- Spend within your means; a credit card doesn’t equal free money.
Hopefully once you understand how interest-free days work you’ll never get stung by credit card interest again.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.