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An interest-free credit card allows Australians to pay for credit card purchases or debt with no interest charged for a fixed introductory period. Essentially, it gives you more time to pay off the outstanding balance of your card, regardless of your statement period, as long as you make minimum monthly payments. 

Typically, credit cards offer up to 44-55 days interest free before you need to make minimum credit card repayments by the due date, or you'll be charged interest on your card balance. But a zero per cent purchase card usually gives users between six and 15 months, sometimes higher, before they are hit with interests.

That means cardholders may be paying no interest on the outstanding balance of their credit card for the first year of having it.

What is a credit card purchase rate?

The purchase rate on a credit card is the interest rate at which any purchases made with the card are charged if the full balance is not paid by the end of the statement period. The purchase rate is typically charged per annum, and varies from issuer to issuer. 

Credit card purchase rates have generally sat around 15-17 per cent on average since the 1990s. However, it’s possible to get a purchase rate well into the 20 per cent rate, and ones under 10 per cent, if you know where to look. Unfortunately, a credit card purchase rate is one of the biggest contributors to credit card debt. If you’re unable to keep on top of your card payments and you have a high purchase rate, your debt may snowball out of control. 

What is a cash advance rate?

The cash advance rate is the interest rate at which any money you withdraw is charged whether via a branch or ATM in Australia or overseas. The cash advance rate is typically higher than the purchase rate. Generally speaking, it’s recommended that cardholders avoid withdrawing cash via their credit cards due to the commonly high cash advance rates card issues can charge. 

What is a good credit card interest rate?

A good credit card interest rate is, generally speaking, one the cardholder can afford without growing debt. Ideally, you would aim to not pay credit card interest at all by paying your full card balance each statement period. You may also opt for a credit card offering a no-interest introductory period, or a zero per cent interest balance transfer credit card, to avoid paying interest for a set period of time. 

If you find yourself constantly paying interest on your credit card balance, consider switching to a low rate credit card instead. This way you can try to keep this ongoing cost down and prevent your debt from growing out of control. 

How does interest on new purchases work?

A credit card is like a line of credit with a provider, in that you essentially borrow money from your card provider to fund a purchase. When you apply for a credit card, the bank assesses your income and will assign you a credit limit based on what you can afford to pay back. 

At the end of each billing cycle (typically monthly) you will be sent a statement showing the minimum amount you have to pay back, including any interest payable on the balance.

When talking about credit card interest, providers are typically talking about the purchase interest rate. This is the interest rate at which any purchases made are charged annually if you do not pay your credit card balance in full each statement period, even if you make minimum payments. 

  • There is also cash advance interest, which is the rate charged on money withdrawn from ATMs or branches. You may also come across balance transfer rates, which are the rates charged for transferring your outstanding balance onto a balance transfer credit card. 

Your provider will charge the purchase rate against any outstanding balance not paid within this statement period. The interest rate can vary, depending on the credit card. If your interest rate is 16 per cent, for example, you will not be charged 16 per cent interest on your outstanding balance every month. Instead, this is an annual rate, charged daily on the number of days in your statement period (if you have an outstanding balance).  

A credit card provider may calculate your interest as follows:

  1. Find the average balance over your statement period
  2. Multiply the average balance by the daily interest rate (e.g 16 per cent divided by 365)
  3. Multiply that figure by the number of days in your statement period.

Some credit cards come with a set number of days interest free, otherwise you'll start accruing interest from the day you make a purchase, or the day your monthly statement issued. Other cards may offer 0 per cent interest offers that last a number of months. If you can't meet your monthly repayments, these cards may be a helpful alternative.

How to use an interest free credit card

There are a few reasons why a cardholder may want to avoid paying purchase interest for a select period of time, as opposed to choosing a standard low rate credit card. 

  • Big-ticket purchases

If there’s something expensive you know you need to pay for, such as an upcoming overseas holiday or a wedding, it may be helpful to get a zero per cent purchase card to fund the purchase. With a zero interest purchase card, you could pay off the expensive purchase over time without being hit with interest. Take note that you could be charged card fees, such as an upfront annual fee, a higher interest rate on purchases, or a cash advance rate after the introductory period ends.

  • Pay down debt

Interest free credit cards can also be used as a debt management tool, particularly if the card comes with a balance transfer offer. A balance transfer is where a cardholder can move their outstanding credit card debt to another card that does not charge interest for a set period of time. This may give struggling Aussies some much needed breathing room to get on top of their credit card debt without being stung by the purchase rate, which only helps debt grow further. 

Keep in mind that balance transfer card providers may charge a balance transfer fee, typically around 2 per cent of your outstanding balance. Further, if you haven't paid off your full closing balance by the time the interest free period ends, you'll immediately begin accruing interest on your credit card account. It's recommended you make a plan and set a budget to ensure your balance is paid in full by the end of the interest free period before making a card application. 

  • Points chasing

Australians love to collect credit card rewards points. These can be exchanged within rewards programs for a range of perks such as Qantas frequent flyer points, or even appliances, gift cards and cashback. If you're a points chaser looking to keep costs down, choosing an interest-free credit card with a rewards program may be one way to boost your bonus points without worrying about accruing interest on your balance and falling into debt. You may also be able to take advantage of credit card perks and protections such as complimentary travel insurance.

Features of a zero interest credit card

It's important that you do your research around what costs and fees may be associated with your potential new credit card. 

There are several key features you should keep an eye out for with interest-free credit cards:

  • Long interest-free periods – To make the most out of your zero interest purchase card, consider a card with a long interest-free promotional period. This will give you time to develop a solid payment plan to clear the debt before the interest-free period ends.
  • Low ongoing purchase rate – Like anything, all good things must come to an end, and so must interest-free periods. Does your card switch to a low rate after its interest-free period ends, or is its standard purchase rate higher than average? Before you sign up, it’s important you focus on the credit card interest rate you will be paying when the promotional period expires.
  • Low or no annual fee – You could argue that a higher annual fee is worth it if the card offers you a longer interest-free period or a lower ongoing purchase rate. But if you’re looking for maximum value, seek a card with a low or no annual fee plus the features that suit your personal needs.
  • Always read the product disclosure statement and the terms and conditions of any potential credit cards before applying. The product disclosure statement contains important information around any potential fees and ongoing costs, and the terms and conditions can outline the conditions of use and any eligibility criteria you may need to meet before applying. If your credit card application is rejected, this can negatively impact your credit score.

What traps should you beware of with interest free cards?

While interest-free cards do have their perks, shoppers should be cautious.

If you’ve still got an outstanding debt when the introductory period ends or you’ve spent over the card's limit, you could be in serious financial trouble.

To avoid falling into debt, credit card holders should make regular repayments to the card. Having the debt cleared entirely when the promotional period ends can let you dodge interest charges.

While interest-free cards sound attractive, if you’re someone who has trouble managing your finances, you may be better off saving for your purchase first and paying upfront. You should carefully look at your specific financial situation, budget and spending profile before making the decision to take out any credit product.

Alternatives to interest-free credit cards

Still not sure if an interest-free credit card is right for your specific financial situation? Here are some alternatives:

  • Low-rate credit cards. If you're the type of cardholder who always struggles with debt and paying off your card balance before the days interest free period is up, it may be worth considering a low rate card instead. A credit card is always going to eventually charge you interest if you don't pay your card account on time, so keeping the amount of interest charged as low as possible may be your solution.

  • Debt consolidation personal loans. If you have multiple sources of debt and are just looking for a means of paying it off (and don't trust yourself to use your new card responsibly), it may be worth considering a debt consolidation personal loan instead. This is where you roll all your existing debts and expenses on to the one loan to simplify your financial situation. With one regular loan repayment and one interest rate to manage, this can significantly simplify your debt repayment process. Further, personal loans typically come with lower interest rates than credit cards.

  • Debit cards. While they may not offer the same perks, rewards and access to credit as a credit card, if you're struggling with debt, sticking with spending only from your bank account is one way you can avoid your card repayments falling into arrears. After all, you're only spending money you actually have.

    Further, debit cards typically come with low fees, if any. Compared to your standard, costly annual fees associated with credit cards, this may also help you to keep costs down. Further, some bank accounts also come with perks similar to credit cards, such as not charging you overseas fees and offering the ability to hold multiple currencies at once. In this way, it may pay to not overlook the humble bank account.

How does credit card interest work?

Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.

If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.

The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.

What is a balance transfer credit card?

A balance transfer credit card lets you transfer your debt balance from one credit card to another. A balance transfer credit card generally has a 0 per cent interest rate for a set period of time. When you roll your debt balance over to a new credit card, you’ll be able to take advantage of the interest-free period to pay your credit card debt off faster without accruing additional interest charges. If your application is approved, the provider will pay out your old credit card and transfer your debt balance over to the new card. 

How to calculate credit card interest

Credit card interest can quickly turn a manageable balance into unmovable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.

The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.

This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.