What is a Credit Card’s interest-free period? and How Does it Work?

While perusing through the Money254 credit cards comparison page, you may have noticed that all credit cards available in Kenya have an interest-free period. 

Wondering what that is all about? Well, this article will take a deep dive into credit card interest-free periods and how you can take advantage of it to literally get free credit. 

Could this be the biggest reason why you may consider credit cards as an option for your cash management? Read on.

First, from all the credit cards in Kenya that our commercial team has verified and analysed, the  average interest-free-period ranges from 20 to 55 days. 

By taking advantage of the interest free period, one can actually pay for goods and services within that period with zero interest! 

What is Credit Card Interest?

Interest is defined as the cost of borrowing money from a lender. It can be shown in different forms; monthly, daily annually etc. depending on the lender and product in question. 

For credit cards, the interest is usually shown in Annual Percentage Rate (APR). 

When you pay for something using a credit card, the issuer pays the seller in advance for you. You then pay back the credit card issue when you pay your credit month bill at the end of the billing period (See ABCs of Credit Cards). 

When you pay the owed bill, you repay the charge/amount used plus any interest that may have accrued. 

The advantage of credit cards is that they allow you an interest-free period. 

What Does Credit Card Interest-Free Period Mean?

Interest-free periods refer to the maximum number of days that a credit card user will not be charged interest for purchases as long as they pay off their balance in full by the due date. 

A card holder can take advantage of this period to buy something when they are short on funds or so that they can maintain their savings in an interest-bearing account. 

How Does the Credit Card Interest-Free Period Work?

First, it is important to note that while you, for example, are entitled to 55 days interest-free for card X, you may not necessarily get those exact number of days for each purchase. 

That is why you need to know how interest-free days are calculated and time your purchases to get the maximum number of days. 

Interest-free periods on any card start on day one of one's statement period. That is the day after receiving your previous month’s bill statement. 

Note that the billing or statement period is 30 days. Which then means that something purchased after the 30 days falls under a new billing period which still also has the same number of interest-free days. 

If one wants to enjoy the entire interest free period, they would have to make a purchase on the card on the first day of the statement period. 

Note that it is important to know the first day of the interest free period so that one is better prepared. That can be done by checking one's credit card statement. 

This will give one a clear indication of when the interest period begins and ends. If unable to determine this using the statement, one can always contact their issuer. 

To understand how the interest free period works, we are going to examine three different purchase periods, at the beginning of the statement period, the middle and the end using a 55-day interest free period. 

Scenario I: Purchase Made on Day One

Let’s start with the important dates that you should have in mind. This is an example.

1. Start of billing period - this is the 1st day of the 30 days you have access to the revolving monthly credit. It is typically the same date as the day your credit card was issued. For this example, we use January 16, 2021.
2. Interest-free period - the period that your card issuer allows you to owe them without paying interest. In this example, we use 55 days. 
3. Start of interest-free period - The interest period begins on the same day as the first day of the billing period; i.e. January 16, 2021, for this example. 
4. End of interest-free period - This is the date after the allowed interest-free days elapse counting from the first day of the billing period i.e. January 16, 2021 + 55 days = March 12, 2021 for this example. 
5. End of billing period - this is the end of the 30 days of the monthly revolving credit after which a statement of all that you have spent is sent to you. For this example, 30 days from January 16, 2021 is February 15, 2021. 

If you for instance bought a television set worth Ksh40,000 on the first day of your statement, January 16, 2021, you will be able to take advantage of the full 55 days of the interest free period. 

That means that if you pay for the TV before March 12, 2021, you will only repay the exact Ksh40,000, nothing more.

Scenario II: Purchase Made on Day 15

In this case, the 15th day of the billing period is January 31, 2021.

If you bought the same Ksh40,000 TV set on January 31, the interest-free period still ends on March 12, 2021 but it means the actual number of days you owe the Ksh40k interest-free is 40 despite your card giving you 55 days.

This is because you will only be left with 40 days to repay the amount as opposed to buying it on January 16, when you had the full 55 days to do so without paying any interest. 

Scenario III: Purchase Made on Day 25

In this example, Day 25 of the billing period would be February 10, 2021. 

If you buy the same Ksh40K TV set on February 10, you will have cut down your interest-free period by 25 days by now. 

So, given the interest-free period will end on March 12, 2021, you will only have 35 days to pay back the Ksh40K before the interest starts accruing. 

PRO TIP: 

What if you wait out the remaining 5 days? Then the billing period will end on February 15, 2021, your bill for those 30 days (let assume you only wanted to buy at TV and nothing else) will be sent (zero). 

At the beginning of the next 30-day billing period i.e. February 16, 2021, you can then buy your Ksh40K TV and get the full 55 days of free-interest credit card borrowing!

What Happens if You Do Not Repay Your Closing Balance in Full?

After the interest-free period has lapsed, whatever balance you carry over to the next billing period will start accruing interest until one clears it in full. 

One can always get back the interest-free period by fully repaying the closing balance by the due date.

How to Avoid Credit Card Interest Charges

Whether buying a big ticket item such as Television set or just paying the water bill, there is only one formula to ensure that one does not part with interest charges: paying the closing balance either on or before the due date. 

If one is worried about forgetting when a payment is due, a calendar reminder on one's phone can come in handy. One can also enter into a debit arrangement with their bank to set up automatic repayments before the interest free period expires. 

Other Ways to Eliminate Credit Card Interest

• Adding an extra coin to your credit card bill will help by reducing the credit card bill in the next cycle.
• Repaying an overdue balance at the earliest convenience will reduce accruing daily interest charges. The sooner one clears their balance, the lesser the interest they will part with.  

• Making purchases at the beginning of interest free periods will give one ample time to raise repayment funds.
• One can also consider using a credit card only for purchases. Some of the available transactions might not only attract higher fees but incur interest even when paid back within the interest-free period. This might include;

                        1. Cash withdrawals

                        2. Foreign Exchange

                        3. Gambling

Other Charges

Although interest charges take up the lion's share of credit card charges, there are other costs that one needs to be aware of. These include: 

1. Joining fee
2. Monthly fee
3. Cash advance fee
4. Late payments fees
5. Over limit fees
6. Annual fees

You can read about these fees here. Note that not all issuers or credit cards have these fees. 

WRAPPING UP

Understanding how the credit card interest-free period works will not only allow one to plan their purchases but will also empower the borrower to pay their balance in full before the loaned funds start accruing interest.