How do interest-free days’ work on credit cards?

22 November 2018

As we enter the Christmas shopping period how do you make sure you’re not left with a New Year credit card hangover? Canstar looks at how interest is charged to your credit card and how to avoid it.

“We all know how we use credit cards, we spend, we get a bill, we pay all or some of the balance off.” Says Canstar’s general manager, Jose George. “If you are the type of person who pays off your bill in full every month, great. If you are not, you and the other credit card holders just like you, are collectively paying interest on a staggering $4,111millions.”

Interest free days

In essence, a credit card is a pre-approved personal loan and you can spend as little or as much of your approved amount as you want. Interest will be applicable on your spend but most credit cards offer either 44 or 55 interest-free days. But what are interest free days and how do they work?

A common misconception is that 44 days “interest-free” means that you will have 44 days to pay off a card purchase before any interest will be charged. In reality, it’s really up to 44 days. The number of days stated refers to the maximum number of interest-free days that are available on a purchase. To get the full 44 days interest-free, you need to make a purchase on the first day of your statement period.

The example below shows purchases at various point of the statement cycle:

On the above example, after Day 44, if the balance is not paid in full, interest will start to accumulate.

The dates of everyone’s statement periods differ so check with you bank, or on the statement itself to find out when yours are. Some issuers will also allow you to choose your own statement date so that you can align it with when you get paid.

Avoiding credit card interest charges

Regardless of how you use your credit card, either for large one-off purchases such as a new fridge or just for everyday purchases, the only one way to ensure you don’t attract interest is to pay off the balance, in full, on or before your payment due day. The most straight forward way to avoid missing the date is to set up a direct debit from your bank account or home loan offset account so that you can’t forget to make the payment.

If it is going to be a struggle to pay off the balance in full, you can minimise the amount of interest you accumulate by:

• Making more than the minimum repayment – every extra dollar will reduce your monthly interest bill.

• Tackling any outstanding balance with extra repayments made before the due date. 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).

• Considering a balance transfer. Transferring your balance to a card offering a lower rate – perhaps even a fixed-term promotional offer of 0% p.a. – will allow you some breathing space to reduce and even clear your debt. It’s not something to jump into without carefully thought so use online comparison sites to compare deals and weigh up the pros and cons.

George concludes by saying:

“Credit cards can be beneficial financial tools if used well, but understanding how and when you pay interest, as well as discipline around spending and paying off outstanding balances is paramount in order to steer clear of debt.”

ENDS

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