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A woman types on laptop, beside her is a Bank Australia credit card

How does credit card interest work?

Andy Kilham
February 29, 2024

If you’re planning on adding a shiny new credit card to your wallet, you need to know how the whole ’55 interest free days’ thing works. It can be tricky to work out what to pay off and how to avoid paying interest on your credit card.

Credit cards can be useful for some people

There's a whole bunch of reasons some people apply for a credit card. Sometimes it's so they can make larger purchases, collect frequent flyer points and sometimes get additional benefits like complementary (read: free!) travel insurance.

They also offer something else: Up to 55 ‘interest free’ days.

That means, for up to 55 days, you don’t get charged interest on the item you purchased on your credit card (which, essentially, is money on loan from us). When you do start getting charged interest, it'll only be from the end of your statement period which is usually 31 days.

But, beware: A common assumption for credit card holders is that it’s 55 days of 0% interest from when they made each of their purchases. Actually, that’s not quite the case.

How 55 day interest-free periods on credit cards actually work

Let’s use an example to help with understanding credit card interest. Say you bought a cute baby monstera plant, on your credit card, for $25 on January 1.

Close up of table with a phone, tea cup and laptop

Your statement period also starts on January 1. For that monstera, you have 55 days to pay it off, interest free.

On January 17, you also bought an obnoxiously tall fiddle leaf fig plant, for your favourite gal pal’s birthday, on your credit card. It cost you $70.

For this purchase, you have 38 days (17 days less than 55) to pay back the fiddle leaf fig purchase on your credit card.

Top of a fiddle leaf fig tree

In this scenario, you’ll have less time to pay back the credit card purchase or ‘loan’ for the fiddle leaf fig.

Your statement due date is February 24 so you pay $95 into your credit card account from your debit account a few days before that date. The balance is now at $0, meaning no interest payments are needed and you’ve paid off your credit card!

What would happen if I didn't pay?

If you couldn't pay for the purchases at the end of the 55 days and there is a balance remaining on your credit card, you would be charged interest. That interest is calculated from the end of the 31 day statement period, in this case, that's January 31. In 2019, new legislation meant that banks charged interest from the end of the statement period instead of the date the purchase was made.

So, for the example above, you would start being charged interest on the $95 from January 31 – not January 1 and January 17.

That’s essentially how interest works on credit cards. If you think you might be carrying a balance after 55 days, it’s definitely worth looking into different credit card interest rates before you open a new card.

But there’s one last confusing bit: When your statement starts and ends

Sometimes, the first day of your statement period, and the 55 days, isn’t actually the first day of the month. It might start half way through depending on your statement period.

So, if your statement period starts on 15th of the month, you’ll have 55 days interest free from the 15th.

Your statement period and due date are both included in your monthly statement so it’s a good thing to keep an eye on so you know what cut off date in the following month you need to pay your credit card by to avoid paying any interest.

It’s also important to know rules changes, special conditions apply and different banks may apply additional or different rules for their credit cards. For example, if you have a balance transfer on your card you typically won’t receive any interest free days at all.

How do you keep on top of your credit card purchases? Let us know over on Instagram, Facebook or Twitter. And if you feel ready to open a new credit card, feel free to explore our credit card options.

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