Interest Free Credit Cards

Credit cards come in a variety of different types, and one of the more popular credit cards are those with interest free days.

Interest free credit cards allow you to spend money on your credit card without paying any interest on the purchases, provided that you repay the full balance before the due date each month.

A credit card with interest free days should not be confused with interest free finance offered by some retailers.  These are two different forms of financing.

How does the interest free period work?

Purchases made on the card during your monthly billing cycle do not accrue any interest immediately, and provided that you repay the balance in full by the due date, no interest will be charged to your card at all.

You will often hear of a card offering 55 days interest free.  This total comes about through the monthly billing period (generally 30 days) plus the time between the end of your monthly billing period and the due date, which is generally 25 days.  This gives a total maximum of 55 days interest free.

For example, let’s say your monthly billing period started on the fifth day of the month and you made a purchase of $1,000 on that first day.  Your billing period would end on the fifth day of the following month, and the due date would be 25 days later on the thirtieth day of the month.

55 days have passed since your original purchase, and provided that you clear the balance in full you will not be charged a cent of interest on that original $1,000 purchase.  If you made the purchase later in the monthly billing cycle, the number of interest free days for that purchase would be reduced.

Traps with interest free credit cards

The biggest trap with interest free credit cards is not repaying the balance in full by the due date.

If you fail to clear your balance by the due date, you will be charged interest on all of your purchases with the interest backdated to the original date of each purchase.  This will occur regardless of whether you make the minimum repayment or any other partial payment of the balance.

The only way to avoid interest is to repay 100% of the monthly balance shown on your statement.

Using interest free credit cards effectively

Interest free credit cards can be useful for those looking to reduce their debts sooner, but you must repay the balance in full each month for this strategy to work.

The strategy works by leaving all of your available money in a mortgage offset account and using your credit card to cover all of your monthly expenses.  The credit card balance must then be cleared each month using funds from your offset account.  This maximises the amount of money in your offset account at all times, which reduces the interest payable on your mortgage each month.

A similar strategy can be used with high interest savings accounts if you do not have a mortgage, however the benefits will be more limited unless you have a high monthly expenditure.

Is a card with interest free days right for me?

If you carry a balance from month to month, a credit card with interest free days will generally not be right for you.  This is because you will be charged the full interest each month, and most interest free credit cards will have a much higher interest rate than cards without interest free days.

Those carrying a balance on their credit card will generally be better off with a low interest rate card without interest free days.

If you can clear your balance each month then an interest free card could be right for you, especially if you can use the card effectively with your mortgage offset account to repay your home loan sooner.

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