Why is the interest free period on my credit card “up to 55 days?”

When you first start using a credit card you probably don’t think about how the interest is calculated and added up each month. What might stand out to you is the “up to 55 days interest-free” line in the bank’s marketing information.

That looks like really good news, especially if you pay off the purchases you’ve made before the 55 days are up. It’s not actually that simple, though. If you’re looking for ways to use your credit card more efficiently, then understanding your interest free period is key.

What is your interest free period?

Your credit card probably came with the promise of a particular number of interest free days. Usually you’ll get an “up to 44 days” or an “up to 55 days” credit card deal, but other cards offer up to 62 days. Some cards don’t have this period at all, however, even if your balance is paid off each month.

Many people think that the 55 days gives you that time to pay off the purchase or purchases made any time within that period before any interest is applied to them. What it actually means is the maximum number of interest free days there can be. If you want to get the full 55 days, you need to make a purchase on the first day of your statement period. You’ll need to talk to your provider or check your statements to find out what day this falls on. Usually, however, it’s the day of the month that you first took out the card.

How does the card’s interest free period actually work?

The actual length of the interest free credit period on a particular purchase depends on which day of your statement cycle you buy the item. If your credit card has the 55-day interest free period, and you buy a new barbecue set for $1,000, then the amount of interest depends on whether you bought it towards the beginning, middle or end of the month (assuming your statement cycle runs from the first to the 30th of each month).

Your 55-day interest free period is, in essence, the statement cycle plus an extra 25 days’ grace to allow you to pay off the balance without incurring interest. If you don’t pay the balance by the end of the grace period, you’ll be charged interest calculated from the day of the purchase.

How the interest free period operates in real life

If you buy the barbecue on the first day of the statement period then you’ll get your full 55 days. However, if you don’t pay the amount off by the end of the 55 days, you’ll be charged interest from the start (day one) of the statement period and this interest will be applied to the end of your next statement cycle.

If you buy your barbie on the 14th day of your statement period, then you’ll have 41 days of no interest, because you’re further along in the cycle. You still have to pay the full balance by the end of the 55 days to avoid interest, however.

Buying your barbie on the last day of your statement cycle should be avoided if you can – just wait until the first day of the next period. This is because you’ll only have 25 days to pay off the balance before you get interest applied on it. Of course, if you know you can pay it off and the in-laws are arriving that weekend, go for it. If not, then hold off for a few days so that you get the 55-day grace period.

How to avoid getting all those interest charges

It doesn’t matter how big each purchase is – whether it’s flights, that gas-fired barbecue or a cream cake – the only way to avoid paying interest on them is to pay off your full balance before the end of your grace period.

You can set up a direct debit each month so that you don’t forget to pay the balance – it could come from your current account or a home loan offset account if that makes life easier.

Other ways to reduce the amount of interest you pay each month

It doesn’t matter how long your interest free period is on your credit card, or how interest is calculated on it (or them). There are a number of other ways in which you can reduce that monthly interest payment.

Make sure that you always pay more than the minimum each month

While it’s tempting to make the smallest repayments each month, you’re actually condemning yourself to years of these payments. You might feel like you’re doing the right thing by continuing to make these affordable payments month after month, but it’s only the credit card provider that benefits.

Too many Australians are stuck in the minimum payment trap, but it only takes a few extra dollars each month to tip the balance in your favour. If you owe around $2,000 on your credit card and you only ever make the minimum payment each month, you’ll be paying it for 17 years!

The problem is that minimum payments are calculated at two per cent of the balance, so your credit card repayments get smaller each month – even more tempting. By the time you’ve finally paid it off, you’ll have spent more than $5,000 (assuming an interest rate of 17 percent). If you paid double the minimum each month, you’d clear the balance in six years, pay a total of $2,900 or so.

Don’t wait until the due date to make extra payments

If you can pay a little extra each month, then pay it when you have it because this will reduce the daily balance of your credit card – the balance that your interest calculations are based on. Say, for example, you see you got a $3.53 discount on your groceries that day; transfer it into your credit card. Every dollar you pay over the minimum frees you up a little.

Look for a good balance transfer deal

If you can transfer your balance to another card that offers you lower or zero per cent interest for a number of months, then you have some room to move. You can significantly reduce your debt this way, as all of your payments go towards the principal balance so it’s also good for repairing bad credit. You need to head to a comparison site to look through the available deals first.

You can compare credit cards from all of Australia’s major banks, credit unions and credit card issuers here.

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.

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