Many tend to overlook the fundamental idea behind having a credit card – namely that a company lends a certain amount of money that can be paid off within a specific time period without accruing any interest. Once you understand the way the ‘interest-free’ period functions for a credit card, you can then use that knowledge to turn your credit card into a financial tool, as opposed to having to pay loads of interest to the credit card company.
Remember that there are different kinds of interest charges when it comes to credit cards, and purchase interest is only one of them. If you’re not clear on the differences between them, then it might be advisable to read up on them so you know how they function.
What is the beginning of the interest-free period?
You will often see that credit cards will advertise an interest-free time period ‘up to a certain number of days’ with all purchases. Know that not every item you purchase will be interest-free for the advertised period of time. That will completely come down to when each and every purchase was made.
For example, say your card advertises ‘up to 44 days’ interest-free on purchases. That means that the 44 day period starts along with the beginning of the credit card statement period. It then will stop at the point in which payments for any purchases during that time are scheduled as due. This means that the 44 day period (or 55 day period, whichever is in effect for your card) is comprised of the statement period for that month, which would be about 30 days depending on the month, along with the specific period you are allowed for the payment of the balance due. Based on whether your card has 44 or 55 interest-free days per cycle, it’ll mean there are 14 or 25 days allowed after the final day of a statement, respectively.
If you made your final purchase in a billing cycle on the first day of the cycle, you could end up with as much as 44 or 55 days interest-free on your purchases, or if you made it at the end of the cycle, as little as two weeks. The most vital point to remember is that all purchases made during a billing cycle will only be interest-free if the balance is paid completely by the due date for that month. Otherwise, interest will begin to accrue.
For a better understanding of this, it’s a good idea to examine the statement period and credit card payment cycle in a bit more detail. Only then can one effectively plan to use credit cards to their full benefit, and minimise unnecessary interest payments. Learn how to read your credit card statement
Payment and statement periods
Each month, credit card statements are sent informing the card holder about the current charges made to the card during the last billing cycle, and the due date for payment. All of these purchases will have occurred during the previous monthly ‘statement period’, and they will be seen near the upper part of the statement on the front page.
If you look on your statement you’ll see information about the due date for your payment. The time period from the end of the billing cycle to the due date will generally be comprised of about a fortnight (or even more than that if your card offers an interest-free period of 55 days). One good way of looking at this time period is as the “payment zone” that allows you to take full advantage of making interest-free purchases.
Note also that if a statement ended its cycle on April 2 for instance, any purchases made after that date (or during the ‘payment zone’) wouldn’t appear on a bill until the following statement is sent.
Karen has a credit card that offers ‘up to 44 days interest-free’ on purchases.
Remember that the interest-free time begins with the first day of the billing cycle.
The first day of Karen’s statement cycle is October 5th, and the last day of her cycle is November 5th (30 days apart). This means her interest-free period ends when payment becomes due on November 19th, 14 days later.
Say Karen wants to purchase a new computer on October 5th. This would give her a total of 44 interest-free days for full repayment without accruing interest. This scenario allows for the longest amount of time interest-free.
On the other hand, if Karen buys the same computer on November 5th, which is the closing day for that billing cycle, then she’d only have a couple of weeks available to pay the computer in full without interest, as the due date is November 19th. Again, the interest-free period is only in effect when the balance is fully paid by the due date for that bill. Remember that this includes not only purchases, but also balance transfers from other credit cards and cash advances.
Compare up to 55 days interest-free credit cards
Compare up to 44 day interest-free credit cards
Full payment maintains interest-free status
Using a credit card means that one can shop conveniently without carrying cash. Paying the total sum due by the indicated date allows you to maintain your interest-free status. This is because the interest is calculated on a daily basis. However, when a monthly billing cycle ends, interest does not start accruing immediately. Instead, additional interest-free time is allotted in accordance with the credit card agreement. Only after the due date has passed does interest begin to accrue on a daily basis, so paying the total due by the due date means that no interest will be required.
Keeping a balance on the credit card account
If the full balance due is not paid by the time the due date comes around, you’ll usually lose the interest-free status for that billing cycle, as well as the next one, because the amount due will carry over to the next bill. Be sure that credit card bills are paid completely in full, rather than paying just the minimum amount due to prevent this.
When you don’t pay the full amount due by the due date, a number of situations will arise:
First of all, as mentioned the interest-free period is lost for that billing cycle. Interest is then charged on the outstanding balance, going back to the date of purchase. Any partial payments will, of course, reduce that amount. The interest due will show up on the statement for the following month.
Next, the following month also loses its interest-free status because there is a balance from the previous month. Interest charges will accrue on the outstanding amount from the previous month, as well as any purchases made in the new month for the entire billing cycle. This interest will be charged each day of the billing cycle.
In addition, any interest remaining at the end of the second month statement will also be added to the balance for the statement in the third month. Interest is then being charged on the balance that was interest to begin with, so paying balances in full is definitely the smartest course of action for the card holder.
Interest is also charged on any fees that are not paid in full by the due date.
Going back to the computer example from above, if someone does not pay their bill in full on the October purchase, they could wind up paying two additional months of interest in the November and December statements. Remember that the interest-free periods are sacrificed from the months of November and December, as well. Daily interest accrues from October on the following items:
- outstanding balances from the October statement;
- any interest accruing on the October balance;
- all new charges made during the November billing cycle.
This means that even if the balance is paid in full with the second month bill, there are still interest charges from the initial statement.
Pay attention to balance transfers
A balance transfer offer is a good way to save money and pay off debts, although it usually comes with one drawback – there are no interest-free periods available on purchases. When a balance transfer is carried out from an existing card, the existing card isn’t automatically closed, so it may be a good idea to continue spending on the existing card and use the new card specifically for paying off the transferred balance rather than making purchases.
Timing is everything when it comes to shopping interest-free
Considering the interest-free period may vary considerably in length, from 44 (or even 55) days to as few as 14 days, it can be a good idea to make larger purchases toward the beginning of a billing cycle, to offer as much time as possible for making the interest-free payment.
It pays to check the dates on your billing statement to know when the perfect purchasing times are. If you wish to purchase a new oven for the kitchen, for example, look at the billing cycle end for the last statement and buy the oven the day after this. Through completing your purchase on that first day of the new cycle, you are taking advantage of every single interest-free day available to you through your credit card account, allowing you time to pay off the oven, the credit card account, and avoid interest charges. Making the same purchase in the waning days of a billing cycle may mean you’ll only have received one pay cheque before your bill is due.
Look at your statement regularly
Refer to your billing statement if you are uncertain of when to make a purchase. Remember, though, that it may not always fall on exactly the same date each month. If the normal date, say the 5th of the month, is on a public holiday or a weekend, the date will be adjusted to the nearest banking day. Saturdays will fall back to the Friday date (i.e. from the 5th to the 4th) while Sundays will move forward to the Monday (i.e. from the 5th to the 6th).
Work around your schedule
If you wish to alter your billing cycle to help it match better with your paydays at work, simply call the credit card company. They can sometimes make these sorts of changes, but be sure to note that this can take a few billing cycles to take effect, so pay attention to the statements you receive.
Keep an eye on your statement and use your credit card like your accountant would -without paying interest.