Many people think that using their credit card is a straightforward process-you buy an item or a service and you pay off this money, usually with some measure of interest added.
It's not actually as simple as this, though, because most cards have interest free periods and by smart use of this grace period, you can save money on your repayments and improve your cash flow.
But you need to understand what's actually going on with your credit card interest to make it work better for you, though.
What actually is interest?
Interest is, essentially, the cost of borrowing money from your lender through your credit card. This cost is expressed as a percentage. The more you borrow, the more interest you'll pay. Your interest rate is the figure you see advertised by the different lenders and it's the rate you'll pay if you don't pay your monthly balance or the amount due on your statement. Very often, if you're looking at a low rate credit card, you won't get an interest free period.
If you're not confident about being able to pay off your balance each month then you're best advised to choose a low rate option and leave interest free cards alone for the time being.
The interest free period explained
Your credit card will have a monthly statement cycle which starts on the same day of each month. Most often, this is the day of the month you took the card out initially, although you can move the day to one that's more convenient for you.
Assuming this statement cycle starts on the first day of each month and finishes on the last day, your interest free period includes a number of days after a particular month's cycle starts. The number of days is usually up to 44 or 55, but it can be up to 62 or as few as zero.
During this window of time, any purchases you make in the last statement cycle aren't subject to interest as long as you pay them off before the interest free period ends.
If you were to buy running shoes on the fourth day of the month and the interest free period your credit card offers is 55 days, you'll have 51 days to pay off this purchase. You must pay it off completely in order to get the benefit of zero interest. If the shoes cost $300 and there's a few dollars remaining at the end of the 55 days, you'll pay interest on the $300, not on the $10 left behind.
What are the benefits of using a credit card with an interest free period?
It's great to be able to buy now and pay later and this is one of the biggest benefits of using a credit card. If you time your purchase right, you could spread the cost of an item between two paydays, for example.
You might not always have an interest free period
You'll often get interest free periods with your credit card when you first open the new account. You'll carry on getting these grace periods for as long as you pay your closing balance off - in full and by the due date - each month.
What if you don't pay your closing balance off fully?
If one month you don't pay off your closing balance in full by the due date you might forfeit your interest free period. So use a credit card repayment calculator to find out how much you're likely to pay in interest if you end up paying it for a few months.
You can reinstate your interest free period, but if you're paying interest on top of your principal balance then you might find it a bit tougher.
Ways to reinstate your zero interest period
Pay your entire balance to get zero interest from that day onward. This balance is everything that you owe on the card up until you pay it, including anything you've spent on it since your last statement. Even if you bought an item earlier that day, it has to be paid off in full.
Alternatively, you can pay your closing balance off (in full, of course) by the due date shown on your most recent statement. This will mean you get zero interest on any new purchases from the start of your next statement period. The amount you pay off is the amount you owe from your last statement period.
Whichever way you pay off the balance, the earlier it's reduced to zero, the less you'll be paying in interest in the long run. If you know it's going to take you a few months to clear the balance, then so be it, but try to make extra payments whenever you can.
How to really take advantage of your interest free period
1) Pay off your balance each month
At the very least you should pay off your balance each month so that you're not having interest applied to it. Make sure you never forget your payment day by setting up a direct debit so that it automatically comes out of you bank account on the day you choose.
2) Make bigger purchases at the start of your statement period
Buying more expensive items at the start of your interest free period gives you more time to pay the balance off.
3) Buy everyday items on the card and pay the amounts off immediately
You don't really need to do this, but if you accumulate credit card points that you can save up towards a goal, then these purchases will actually earn you gifts and even flights. If you travel a lot, then frequent flyer credit cards might be a good idea for you. There are lots of rewards credit card options, too, so you can save up to treat yourself every time you go grocery shopping, book holidays or use other financial products from the same provider.
By thinking and spending smartly, you can not only save money on your credit card bills but you can actually earn rewards or cashback to really improve your cashflow over time.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.