Credit Cards offer one of the greatest conveniences by offering easy credit in the need of the hour. They are notoriously known to make you spend beyond your means and easily fall into a debt trap. One of the most commonly highlighted features of the credit card is the interest free period it offers.
Credit Cards are a necessary evil in the financial world as it offers easy accessibility to credit but charges very high-interest rates. It depends on you to extract the maximum benefit of the interest-free period it offers by using it smartly.
A credit card is an unsecured credit i.e., the bank/card issuer loans an amount to you without any asset as a surety for repayment. The chances of default are very high due to which banks suffer severe losses which can run to lakhs of rupees per person. Hence, the interest rates of credit cards are very high ranging anywhere between 3% – 4.5% per month! This translates to a whopping interest rate of 36% – 52% per year!
Your credit card will have a credit limit specified which is the maximum amount you can spend. This is decided by the card issuer based on your income. Any spend beyond this limit will attract a fine.
Almost all recognized banks issue credit cards with varying interest rates and payback options like free credit period, reward points, free air miles, lounge access, etc. You should understand the features and the terms and conditions of the credit card before you apply for one.
One of the most widely used features to market a credit card is the interest-free credit period. This period is anywhere between 50-58 days for different credit cards. However, it is important to know that the free credit period is not like an interest-free loan and also, it might not be applicable for all credit card transactions.
To understand about interest-free credit period, let’s first understand how the credit card billing cycle works.
How does a credit card billing cycle work?
Credit card billing may seem complicated but it works in the same fashion as any post-paid utilities/services like your mobile services, electricity, etc.
To understand how it works, let us compare it to the billing of a post-paid mobile service.
Assume that you have a postpaid mobile service with a billing period from the 1st of the month to the 30th of the month, and a credit card that has the same billing period. Let us consider billing for January and February.
Let’s assume that you have utilized the mobile services and also made credit card transactions in January. The bill for both is generated on the 1st of February. In both cases, you are not expected to settle the bill immediately. Your service provider would have given you a due date by which you have to pay the bill.
Usually, a time of 15- 20 days is given to pay the bill. Let us assume the due date for both is the 20th of February. In utility services, you are expected to settle the bill in full within the due date but on a credit card, you can either pay in full or pay only 5% of the total billed amount by the due date.
Since the credit card allows you to make minimum payments, there can be outstanding balances of previous months also. The outstanding balances are also added to the latest credit card bill.
What is an interest free period?
An interest-free credit period is also referred to as an interest-free grace period. It is the timeframe between your billing cycle’s end to the payment due date.
Is it really an interest-free period? Well not exactly. Your credit card doesn’t bill you immediately after every transaction but instead bills for all transactions in a given billing period, and gives you some time to settle the bill. Also, the interest-free credit period can be applied only if you do not have any outstanding amount from the previous months.
The credit card provides you the flexibility of paying your bills in part by paying the minimum amount due every month and continue to enjoy the services until your credit limit is exhausted.
Considering the previous example, only the credit card transactions made on the 1st of Jan would be interest-free for 50 days. All other purchases made subsequently up to 31st Jan would be interest-free for a lesser number of days.
Let’s understand how the interest-free credit period works for different scenarios.
1. You don’t have an outstanding balance of previous months.
Assume you have made a transaction of Rs.10000 on 10th Jan and another of Rs.50,000 on 15th Jan. Then, the total bill as of 1st Feb will be Rs.60000. You can pay this in full or pay 5% of it i.e., Rs.3000 by the due date 20th Feb.
If you pay in full, there will be no interest charged. If you pay only the minimum amount due, then an interest as specified (assume 4%) will be levied on the balance of Rs.57000 and added as an outstanding balance of Rs. 59280 to the next month’s bill.
2. You have outstanding balances from previous months.
Assume that you have a previous outstanding balance of Rs.25000. Assume you have made a transaction of Rs.10000 on 10th Jan and another of Rs.50,000 on 15th Jan. Then, the total bill as of 1st Feb will be Rs.85000. You can pay this in full or pay 5% of it i.e., Rs.4250 by the due date 20th Feb.
If you pay in full, there will be no interest charged. If you pay only the minimum amount due, then an interest as specified (assume 4%) will be levied on the balance of Rs.80750 and added as an outstanding balance of Rs. 84038 to the next month’s bill.
If you observe the scenarios, the interest-free credit period is just applicable for one particular scenario and is not valid for any other scenarios. Not paying the outstanding in full can lead to levying of huge interest rates on your credit card spend.
Important things to know about your Credit Card
- A credit card should be taken as a convenience and not for the interest-free credit period it claims to offer.
- A GST of 18% levied on your credit card interest charges will further increase your outstanding balance.
- If you make cash withdrawals on your card, the interest-free period is not applied.
- You will be charged a late payment fee + 18% GST if you don’t pay at least the minimum amount due on time. This fee is either fixed or calculated as a percentage of the outstanding balance.
- You will be charged a fine + 18% GST if at all you spend more than your credit limit.
- Your card might have high annual charges. So, check before you apply for one.
- Maintaining an outstanding balance of more than 30% of your credit limit will have a poor impact on your credit score.
- Late payments and frequently spending beyond your credit limit will impact your credit score.
- Reward points, lounge access, etc. are not small benefits given and are of low value as compared to the interest charges you would be paying if not cleared in full.
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