The most lucrative feature of a credit card is the interest free credit period offered to cardholders. The interest free credit period is generally 40 to 50 days (varies for different cards). Most of us are impressed by this interest free credit period. But is the money really free? Lets find out?
Yes the money is free if you are a smart spender: making all your card payment in full on time.
When you make a purchase through your credit card, you have taken a loan. It's how you repay that loan that will determine whether the money is free for 40 to 50 days or if there are some financial implications to the deal. Credit card issuing banks calculate the bill payable on monthly basis. They follow a billing cycle for deciding the consolidated bill payable for the month. All purchases through a credit card in a particular billing cycle is charged to your monthly bill and the payment date is generally 10 to 20 days from the last day of the payment cycle. So the interest free credit period works out to be 40 to 50 days (billing cycle period, 30 days + due date, 20 days).
Lets see how it works:
Suppose your card has a billing cycle from 1st of the month to 30th of the month and you make a purchase through the credit card, say on 20th of the month. The interest free credit period in this case will be only 30 days instead of 50 days (30-20+20). Similarly if the purchase was on 29th of the month interest free will be only 21 days.
So it all depends upon when you are using your credit card to make the payment. If you are paying through the credit card for the purchase in the beginning of the payment cycle, you will get more interest free credit period.
So plan your purchase accordingly to get the best out of your card. In fact it will not be a bad idea to go for another credit card with a different payment cycle. This will enable you to take full advantage of the interest free credit period as you can pay using the alternate card. But take care to pay all card bills on or before due date in full. If you fail to do that you will end up paying an interest of 2% to 3% per month to the card issuing company, which works out to over 40% per annum. The interest free credit period is a bonus, but only if you don’t default on your bills.
