Very few credit card users have clear perspective on what constitutes an interest-free period in credit cards. A common misconception is that if a credit card, for example, provides a 52-55days’ interest-free period, then each transaction will have that 52-55days’ interest-free period. This is a faulty assumption and hence, planning your transactions accordingly can land you with hefty finance and late-payment charges. Therefore, it is important to understand the concept of “interest-free grace period”.
Defining interest free period on credit cards:
‘Interest-free period’ of a particular card transaction is the period between the date of your transaction and due date of payment of its billing cycle. During this period, you don’t pay any interest on your transaction, provided you repay your entire outstanding by bill due date.
Let’s assume that your billing cycle starts from 1st of every month and your due date falls on 20th of every month. Now, if you make a transaction on 2nd August, you can repay it till 20th September, without paying any interest for it. Thus, you can enjoy up to 50 days of ‘interest-free period.’ However, if you make a transaction on 30th September, the last day of that billing cycle, you will still have to repay it by 20th September. In this case, your interest free period works out to be just 20 days
How does it help your finances?
When you pay through your credit card, the actual payment is made by the credit card issuer and not you. You repay the card issuer later on, either by the due date or thereafter. If don’t pay the dues on time, you may incur late payment fee and finance charges on the outstanding amount.
For instance, if you spend Rs 20,000 in a bill cycle through credit card and pay the entire outstanding on the due date, you are not only getting zero-cost finance from your card issuer for those 20¬–50 days, you can also earn interest on that Rs 20,000 by depositing it in a savings bank account for those days. In simple terms, you are not only using card issuer’s money for free, you are also earning an interest on it.
How to make most out of interest-free period?
Make high value transactions at the beginning of your billing cycle: Spending through credit card at the beginning of the billing cycle allows you to get more time to repay your dues. For example, assume that your billing date and pay-by-due due are 30th & 20th of every month, respectively. If you make a transaction on 29th July, you will have to repay it by 20th August, thereby getting a grace period of 22 days. However, if you postpone it to 1st August, then your pay-by date will be 20th September. Thus, postponing your transaction by just 3 days lets you avail a higher interest-free period of 49 days.
Distribute your transactions across multiple cards: If you own multiple credit cards with different due dates, then distribute your transactions among those cards in such a manner that all the transactions happen in the beginning of their billing cycles.
For example, if you have two credit cards, ‘Card A’ and ‘Card B’, with billing dates of 4th and 20th of every month, respectively, then, use Card A for transactions between 5th and 20th and use ‘Card B’ for transactions between 21st and 4th. This will allow you to enjoy maximum possible ‘interest-free credit period’ for all transactions. However, ensure to keep track of bill dates and due dates of all your cards to avoid finance or late payment charges.
Things to keep in mind while availing ‘interest-free period’
Pay your entire credit card dues: Ensure making full payment of card dues as non-payment or part-payment of a particular billing leads to the withdrawal of interest-free period on new transactions in the subsequent bill cycle. In addition to this, I would recommend you to consider online payment in order to avoid late payment or finance charges due to non-clearance of cheques.
Never withdraw cash: The concept of interest-free period does not apply on cash withdrawals. Interest on cash withdrawal is charged right from the first day till the date of its repayment. Additionally, cash withdrawals also attract cash withdrawal fee.
To sum it up, your credit card can become a zero-cost source of funds if you are a disciplined borrower with a proper knowledge of interest-free period. Proper knowledge of interest-free period along with other credit card benefits will allow you to undertake large transactions even if you are going through short-term financial crunch.
-by Sahil Arora, VP and Business Head -Payment Products, Paisabazaar.com
