Understanding Grace Periods And Interest Free Periods

Knowing the way in which interest free days works is fundamental to both getting the most out of your card(s) and for the debt-management plans outlined later. The first thing to know is that interest free days are only available on Purchases (unless otherwise stated in your terms and conditions, or as a balance transfer offer etc.)

It's important to note that the terms for credit cards vary from country to country. Many countries have a 25 day payment 'Grace Period' (eg. USA, UK, Canada) while other countries have a '55 Day Interest Free Period' (Australia, New Zealand, some of Asia and Europe.) The time period is essentially the same (30 day statement period plus 25 day grace period = 55 days interest free.)

But the terms for eligibility are very different!

With a Grace Period, you need to pay the Full Owing Balance by the Due Date to be eligible for interest free. In other words pay the card off entirely, including any card usage after the statement period finishes.

However, for '55 Day Interest Free' cards, you only need to pay the Statement Closing Balance by the Due Date to be eligible for interest free. In other words, excluding any card usage after the statement period finishes.

Note also, for some cards you need to have paid the previous statement's closing balance by the due date too, so you may wish to check those terms and conditions, as this may mean a one or even two months delay for eligibilty! If so, you may wish to use a card without this condition for the plans.

To restate this important point: the Closing Balance for the Statement Period will often vary from the actual credit used by the Due Date, due to any payments or card usage between the statement period end date and the Due Date (approximately 25 days.) What this means in practice is for '55 Day Interest Free' cards you don't need to pay your whole owing balance to be eligible for interest free days - only the Closing Balance shown on the Statement. But for 'Grace Period' cards, you DO need to pay the whole owing balance to be eligible. Burn this distinction into your memory as it will become a very useful piece of knowledge!

A simple example will help clarify these points. Say I have a new card and in my statement period I buy a DVD Player for $200. After the statement period finishes, but before the due date, I buy a TV for $500. To be eligible for 55 Day Interest Free Days I pay the $200 Closing Balance by the Due Date. The next Statement is sent out approximately a week later and I have until it's Due Date to pay $500 for the TV to be eligible. If I only pay $499, I should not be surprised when my next statement includes interest charged on the TV Purchase (based on my average unpaid daily balance for the period.) Yet for a Grace Period card, given the same situation, I would need to pay the full $700 by the Due Date to not pay interest.

So as you can see, consumer awareness makes a big difference. The advantage is to the financial institution in the case where the customer hasn't read their terms and conditions, goes and makes purchases, then rings up a month later and complains they didn't get their interest free days. Oh well, maybe next time.

But the advantage is to the consumer when they do take the time to read and understand all that funny-worded fine print, even if they need to have a long conversation with a customer service officer to get it clear. Or you read this or some other report that actually explains it (hopefully ahead of time.) If it's still unclear, go back and reread, because not 'getting it' is going to cause difficulties at some stage. (maybe not today, maybe not tomorrow, but soon and for... hang on! Back, cliché! Back!)

In contries where available, most of the card offers include the '55 Day Interest Free' period. If you have a card without this facility, you can usually change to a card product from the same financial institution that does. Otherwise you start paying interest from the day you make a purchase. No fun!

To my knowledge, 55 Day Interest Free cards are available in Australia, New Zealand, and some parts of Asia and Europe. Grace Period cards are available in the USA, UK and Canada. Residents of countries not listed here will need to check for themselves as availability will vary. It's worth checking a card's terms and conditions as not all cards go by 25 or 55 day periods. There are, for example, cards with 20 day Grace Periods and other cards with 44 Days Interest Free!

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