How your credit card’s interest-free period works
Update: From 1 July 2012 we’re charging interest on fees that you don’t pay on time. We’ve updated this post to reflect that.
It’s easy to forget what a credit card actually is – basically it’s a lending facility provided by a bank which gives you the chance to make purchases without paying interest for a specified period. If you understand how a credit card’s interest-free period works, you can shop smart to make the most of this lending facility and avoid paying purchase interest.
Purchase interest is just one type of credit card interest. If you haven’t already, you might want to read about the different types of credit card interest .
When does the interest-free period for purchases start?
You’ve probably seen that our credit cards all offer an interest-free period of “up to 44 days” or “up to 55 days” on purchases. But it doesn’t mean every purchase you make is interest-free for that length of time. It depends on when you make each purchase.
The 44 (or 55) days begin at the start of your statement period and end when your payment for that purchase is due. In other words, the 44 or 55 days is made up of the monthly statement period (approximately 30 days) plus the time we give you to pay your statement balance. This is either 14 or 25 days from the last day of the statement period, depending on whether your card has 44 days or 55 days interest-free.
So you could get between a fortnight interest-free or a maximum of 44 or 55 days.
The most important thing to remember is that you only get the purchases interest-free if you pay your closing balance in full by the due date each month.
To get the full picture, let’s take a closer look at how the statement period and payments work. Then we’ll talk about how you can shop smart to make the most of the interest-free period.
How do statement periods and payments work?
You’ll always get a monthly statement telling you which charges are due and when you have to pay them by. The charges all fall into the month-long “statement period,” which are near the top of the first page of your statement.
To the right, the “Payment details” box shows when your payment is due. The gap between the two is usually at least two weeks (longer if you have 55 days interest-free). You could call this gap your ‘payment window’ – the time you have to make your payment to take advantage of your interest-free period.
Because your statement closed on August 3, anything you purchase during your payment window will appear on your next credit card statement.
Say you have a credit card with up to 44 days interest-free. Using the example above, your interest-free period began on 5 July and ends when your payment is due on August 17. So if you use your card to buy that 3D television you’ve wanted on July 5, you’d have 44 days to pay it back in full without having to pay any interest. This gives you the maximum interest-free period.
If you bought the television on August 3, the day your statement closed, you’d only have a few weeks to pay it back interest-free. But remember, interest-free days only apply if you pay your closing balance in full by the due date (including any purchases, cash advances and balance transfers).
- Pay your closing balance in full by the due date to avoid interest charges and retain your interest-free days in the next statement period
- Give yourself a longer interest free period by making purchases at the start of your statement period
- Everyone’s statement cycle is different so check yours to see when your month begins
Paying your balance lets you keep your interest-free days
Having a credit card allows you to make purchases without using your own money, and if you pay your balance in full by the due date, you get to keep your interest-free days. We calculate interest on your card balance daily. At the end of the month, instead of charging the interest (like on a home loan), we wait to give you time to pay (usually a fortnight or more). If you pay off your full balance in this time, you keep your interest-free days and interest won’t be charged.
What happens if the balance isn’t paid in full?
If you don’t pay your full closing balance by the due date, you lose your interest-free period for the current statement – and the next. We’re not talking about paying the minimum payment amount, but the full closing balance on your statement. That’s $5,638.25 on the example above.
What happens if you lose the interest-free period?
Let’s expand on
the example above. The statement period ended early in August, so we’ll call it your August statement.
If you don’t pay the full closing balance by the due date (August 17), a few things happen:
- You don’t get to keep your interest-free period, so we calculate interest on every purchase on that statement from the day you made them (minus any payments you made to reduce your balance). Put another way, it’s a month’s worth of interest, calculated on the balance of your card each day. We’ll charge this interest in your next statement (September).
- You don’t get an interest-free period for your September statement period. This means you’ll pay interest on the whole of the September statement calculated on the daily balance. So the outstanding balance that carried over from your August statement plus any new purchases you make during the September statement period will have interest calculated daily.
- The interest from the September statement becomes a part of your opening card balance for your October statement. This means you’re starting to be charged interest on interest. Read about this in the different types of credit card interest .
- Fees will also attract interest.
So, by not paying your August statement in full to cover your TV purchase, you end up being charged two months’ worth of interest on your September and October statement. That’s because the September statement period won’t have an interest-free period, so you’ll be charged daily interest on:
- any balance that carries over from the August statement, plus
- the interest that applies to the August balance, plus
- any new purchases you make during the September statement period.
So even if you pay your balance in full when you get your statement in September, you’ll still see interest charges on your October statement.
The bottom line…
Paying your credit card closing balance in full by the due date each month is the only way to take advantage of an interest-free period on purchases. But keep in mind, if you’ve transferred a balance from another credit card, you don’t get any interest-free period on your purchases. Read more about managing your balance transfer .
Shop at the right time to make the most of your interest-free days
As we’ve seen, your interest-free period can be as long as 44 (or 55) days, or as short as 14. That means that timing your purchases right can give you up to 30 (or 41) extra days without interest. So try to make your big purchases at the start of your statement period.
Say you’re looking to spend around $1,500 on a new computer, so you check your statement period to time your spending. Say it ends at midnight on August 3, like the above statement. So a new period begins on August 4.
By buying your new computer on August 4, you get every possible interest-free day. That gives you three fortnights’ worth of paydays to pay off your credit card bill and new computer.
On the other hand, if you go shopping in the last few days of your statement period, you’ll only have one payday before your credit card bill is due.
Statement periods can move a day or two
Everyone’s statement period is different, so check your statement to see when it begins. There’ll be a particular date, say, the 2 nd of each month. If that date falls on a weekend or holiday, it will be the closest banking day to that date. So if the 2 nd falls on a Saturday, your statement period will start on Friday the 1 st instead. If the 2 nd is a Sunday, it will start on Monday 3 rd .
Change your statement period to suit your payday
To make your payments on time, make sure the statement period starts a couple of days later than your payday to allow for weekends and public holidays. Just contact the bank to arrange this, but note that it can take several statement cycles to adjust to the date you need, so allow enough time.
Remember the bottom line!
Paying the full closing balance on your credit card statement on or before the due date is the only way to get your interest-free days. That’s the key to making the most of your credit card. Want some extra tips? Read more about avoiding credit card interest .
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