How to manage interest free period in credit cards?

Naveen KukrejaPaisabazaarSumit Chanda, a private sector executive in his thirties, was excited when he was told that a particular credit card allows one to avail interest free period of 50 days. Sumit applied for that credit card and accordingly managed his repayments, only to find himself paying hefty finance charges and late payment fee every month. Clearly, interest-free grace period is not what he assumed it to be. So, what is interest-free grace period? ‘Interest-free period’ for a particular transaction is the difference between the date of credit card transaction and due date of payment for that billing cycle. During this period, you do not have to pay any interest on your transaction, provided you pay the entire outstanding by bill due date.For example, assume that Sumit’s billing cycle starts from 5th of every month and his due date falls on 24th of every month. Now, if he makes a credit card transaction on 5th April, he can repay that outstanding amount till 24th May, without paying any interest on it. In this case, he can enjoy up to 50 days of ‘interest-free period’.However, if he enters into a transaction on 4th May, the last day of his billing cycle, he will still have to repay it by 24th May in order to avoid paying interest on it. In this case, his interest free period works out to be just 20 days.How does it affect your finances?When you make a credit card transaction, it is not you who pays for that transaction. Instead, it is the credit card issuer who pays on your behalf and then you repay the issuer either by the due date or thereafter (in this case, you pay finance charges and/or late payment fee on the outstanding amount). So, if you spend Rs 10,000 through a credit card (instead of paying in cash or through debit card) and availed an interest-free period of 50 days, you are not only financed by your card issuer for 50 days, you can also earn actual interest on the amount by depositing it in a savings bank account. In simple terms, you are not only using someone else’s money for free, you are also earning an interest on it. How to make best use of interest-free period?Go for high value transactions at the beginning of the bill cycle: Spending or making big payments through credit card at the beginning of the billing cycle has two benefits. First of all, you will get more than a month’s time to settle the dues. Secondly, you can earn a notional interest on it, however small that interest might be, assuming that you have parked that money in a savings account or any interest-earning instrument.Juggle your transactions among multiple cards: If you have multiple credit cards with different due dates spread across the month, you should use those cards in a manner to make sure that all the transactions take place in the beginning of their respective billing cycles. For example, assume that you have two credit cards ‘Card A’ and ‘Card B’ with billing dates of 1st and 15th of every month respectively. For transactions occurring between 1st and 15th, use ‘Card A’ and for transactions between 16th and 31st, use ‘Card B’. This will allow you to avail maximum possible ‘interest-free credit period’ for all transactions. However, remember that having too many credit cards may bring down your credit score. Also ensure to keep track of multiple bill dates and due dates in order to avoid finance or late payment charges.Things to keep in mind while availing ‘interest-free period’Always pay your entire outstanding bill: Many credit card users are unaware of the fact that interest-free period on new transactions is withdrawn on the non-payment of the entire outstanding bill of the previous billing cycle. In addition to this, consider making online payment of your credit card bills in order to avoid finance or late payment charges due to non-clearance of cheques.Avoid cash withdrawals: The concept of interest-free period is not applicable in case cash withdrawals through credit cards. Interest is charged right from the first day of cash withdrawal till the date of settlement of dues. Apart from the interest, cash withdrawals also attract an additional cash withdrawal fee. Remember, your credit card can be a zero-cost source of funds if you happen to be a disciplined borrower with a proper understanding of interest-free period.