You do know that credit card companies charge interest on any outstanding balance on your card, right? Interest is unavoidable if you are carrying over a balance to the next month. To minimise the cost of credit, you need to first understand how credit card interest makes way into your monthly statement.
Interest-free grace period
If you have received your credit card on the first day of the month and you are making a purchase of S$100 on the card on that very day, you will not be charged any interest until the end of the billing cycle.
The billing cycle usually closes on the 24th of the month. Usually, the payment due date is the 21st of the next month.
For instance, if you got your card on the 1 January, the billing closes on 24 January and the due date to pay the bill would be 21 February.
You will have time to repay until 21 February to pay the S$100 to the bank/credit card company in full without paying any interest on it. If you pay off the full balance amount every month, you will be able to retain the grace period throughout the billing cycle.
As long as you are not carrying over the balance to the next month, you can enjoy the benefit of an interest-free grace period.
Losing out on grace period
Let’s suppose you didn’t pay the S$100 by 21st February. You paid only S$50 instead. Then the rest of the balance will be carried over to the next month’s bill. The credit card grace period ceases completely if you are carrying forward the balance to the next month. The remaining S$50 will attract interest when the next billing cycle begins.
If you make any new purchase, interest will start accumulating on that as well. You won’t be able to take advantage of the interest-free grace period as long as you have pending balance from any of the previous months.
How interest is calculated
The interest is not charged on the balance, it accrues daily. The daily periodic rate is calculated by dividing APR by 365. If the APR is 20% p.a., the daily periodic rate is 20/100 x 365 which is 0.054%.
The balance will vary through the billing cycle. If your revolving balance on the 15th day of the 30-day billing cycle is S$80, the average daily balance will be S$60. The interest will be average daily balance multiplied by the daily periodic rate and days in the billing cycle. Hence the interest is S$60 x 0.054 x 30= S$0.972.
The interest compounds if you don’t pay off the balance. This could be the reason for your debt going out of control. You need to make sure you can repay the credit card balance in full each month.
How to regain the grace period
If you want to avoid having to pay interest on your purchases and make full use of the grace period, you need to start paying the outstanding balance in full on time each month.
The grace period is applicable only to purchases and not to cash advances. Cash advances start accruing interest right away. They have their own interest rates which are higher than the charge for purchases.
To make the most of the grace period, you should bring down your balance to zero. For some credit cards, the bank will reinstate grace period only if your card has no outstanding balance for two full billing cycles.
Making the most of the grace periods
Ensure that you are paying your credit card bill in full before the due date. Otherwise, you will end up carrying the balance forward to the next month and accrue interest. This interest will prevent you from getting any grace period on purchases.
Of course, it is not the end of the world if you are carrying over a small balance each month. But to regain the grace period, you HAVE TO pay the balance in full before the due date.