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How does a credit card interest free period work?

How does a credit card interest free period work?

You’ve nabbed a credit card with a high number of interest free days but realised you’re not quite sure when the first day starts, or if your interest free days apply to each new purchase.

You’re not alone, as understanding credit card interest free periods can be slightly confusing at first. Let’s dive into interest free periods and simplify this so you can make purchases and potentially avoid interest with ease.

What is an interest free period?

First and foremost, we need to look at what exactly an interest-free day is on a credit card to understand how it works over a set period of time.

Put simply, interest-free days are the number of days at which purchases made within your statement period will not accrue interest. Some credit cards will offer the cardholder a number of days ‘interest free’, generally around 44 – 55, but can be higher or lower depending on the provider. Some cards may also come with no interest free days.

It does not mean, for example, that if your credit card offers 44 interest-free days, that every time you make a purchase, you have 44 days from the time of the purchase before you begin to accrue interest on it. In fact, it’s based around your statement period and total outstanding credit card balance.

Your statement period may begin at the first of the month, or the day you were approved for your credit card. This will be available on your credit card statement.

So, if your credit card statement period begins on the 1st of the month, and you make a purchase on the first day of your statement period, you will not be charged interest on that purchase for however many interest free days you have on offer. I.e. that purchase will begin accruing interest 44 days after the 1st of that month.

How your billing cycle works

Confused? It may be worth taking a moment to better understand your credit card billing cycle before we continue.

How Credit Cards Work: Billing Cycle and "Grace Period"

How does an interest free period work?

Your interest free period is the number of interest free days on offer with your credit card. For example, 55 days interest free.

Your interest free period works as per the following:

  1. Your statement period begins – either first of the month or the date your card application was approved.
  2. Your interest free period begins from this same date.
  3. You make a purchase on the first day of your statement period. Interest will begin accruing on this purchase at the end of the interest free period, e.g. you have 55 days to pay off your card balance before you’re hit with interest.
  4. You make another purchase seven days later. You now have 48 days (55 interest free days minus seven calendar days) to pay off your balance before you begin accruing interest.
  5. You make a purchase the day before your statement period ends, e.g. the 31st of the month. You only have 25 days (55 interest free days minus 30 calendar days) to pay off this purchase.

Ideally, you would have waited one extra day to make the last purchase and your interest rate period would have reset, as your statement period would have begun again.

Here is a helpful breakdown of your billing cycle and how the interest free period fits into two calendar months.

how your credit card interest free period works

How to never pay interest on your credit card

Interest free days are a handy way for cardholders to try and limit the amount of interest they’re charged.

If you’re able to pay your statement balance in full each cycle before the end of your interest free period, you’ll potentially never pay interest on your credit card. Being aware of how your credit card works may be invaluable in helping you avoid falling into debt and stay on top of your bills.

As mentioned earlier, some credit cards do not offer any interest free days, and any purchase you make will begin accruing interest immediately. Further, if you have a balance transfer credit card and make any new purchases with said card, those new purchases will immediately begin accruing interest.

This is why it’s crucial you not only do your research around the number of interest free days offered by your card provider as well as the purchase rate, but also ensure you’re using your credit card intelligently.

If you are paying off a balance transfer, you may want to lock your balance transfer card in a drawer or chuck it in the freezer so you’re not tempted to make any new purchases, which will immediately be hit with interest.

It’s also important to note that even if you keep credit card interest to a minimum you may be stung by ongoing fees, such as annual fees and foreign transaction fees. Don’t forget to look at the potential fees on offer that may

How to find credit cards with the highest number of interest free days

Comparison tables allow you to compare credit card options with ease, with the ability to filter your results based on the maximum number of interest free days.

By utilising comparison tables to your advantage, you may be able to find some competitive high interest free day offers, paired with low interest rates and low fees. Keep an eye out for any ongoing fees as well that may up the cost of your credit card.

Here are a few low rate, high interest free period credit card options:

Credit cardPurchase rateInterest free days
Bank of us Visa Credit Card

9.99%

57

Auswide Bank Low Rate Visa Card

8.20%

55

American Express Low Rate Credit Card

8.99%

55

Community First Credit Union Low Rate Credit Card

8.99%

55

Easy Street Financial Services Easy Low Rate Visa Credit Card

8.99%

55

Defence Bank Foundation Visa Card

8.99%

55

Source: RateCity.com.au. Data accurate as of 22.10.2020.

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This article was reviewed by Senior Journalist Tony Ibrahim before it was published as part of RateCity's Fact Check process.

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