Understanding credit card interest-free days

Australian credit card customers are fighting an uphill battle against growing credit card interest fees by failing to take advantage of their cards interest-free days. 

With hundreds of credit cards to choose from, it can be easy to get lost in a sea of competing offers, interest rates and annual fees when looking for the right card for your needs.

But one of the most important credit card features to be aware of is interest-free periods. Understanding how interest-free periods on credit cards work can help you beat the extra charges and save money.

What interest-free really means

When you shop around for a credit card, you will notice that some cards offer interest-free periods of up to 44 days or 55 days. The interest-free period begins at the start of your statement period and ends on the date the payment is due.

The statement period is around 30 days, with lenders then allowing you 14 or 25 days to make your repayment. Those two timeframes combined make up the common 44- or 55-day interest-free period that most providers offer.

So if you charge something to your credit card on the first day of your statement period, you will enjoy the full 44 or 55 days interest free, depending on your card. If you purchase something on the day your statement period ends, you will receive only 14 or 25 interest-free days on that purchase.

The interest-free catch

The most important thing to note, however, is that the interest-free period only applies if you pay off your credit card balance in full by the due date. If you only make the minimum repayment required – or anything less than the full balance – you will be charged interest on the outstanding balance, which will appear on your next statement.

You will lose the interest-free privilege in that statement period and the interest you pay will appear on the following statement as part of the opening balance, meaning you will be charged interest on the interest.

So if you don’t pay off your May statement in full, you lose the interest-free period for the June statement period. You will be charged interest on the outstanding balance from May and on all purchases made in June, and the interest from the June period will appear on the opening balance of the July statement.

What you end up paying

“With all credit cards, the golden rule is to pay them off in full every month otherwise the penalties are great,” said financial adviser Greg Pride of Centric Wealth.

“The interest rates we are talking about can make it a very expensive exercise.”

The average interest rate on credit cards in Australia is 17 percent, which means you end up paying a lot more than the original purchase price if you don’t pay off the full balance each month.

Credit cards with interest-free periods tend to charge higher interest rates and annual fees, so they are only worthwhile if you pay off the full balance each month. That’s the only way to enjoy the benefit of the interest-free days and avoid paying interest altogether.

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