How to avoid paying credit card interest and late fees

It’s important to understand how your credit card works so you can avoid paying unnecessary interest and late fees. Credit cards are a convenient way to make purchases so it’s no wonder over 13 million Australians have a credit card.   To help maximise your benefits from using a credit card we’ve put together 4 things you need to know.

Keep in mind, these are just examples based on Heritage credit cards– it’s important to find out exactly what applies to your particular credit card.

1. Know your credit card statement period

With most credit cards, the day your credit card is approved becomes the same date each month that your credit card cycle will begin again.  

For example, if your credit card is approved on the 17^th of November, then the 17^th of each month will be the date your credit card statement is issued.  All transactions (purchases, cash advances, balance transfers, fees and charges) made from the 17^th of one month to the end of the 16^th of the next month will be added together to get the total amount owed for that cycle (plus previous balances you haven’t paid minus any payments received).  This is called your ‘closing balance’.

Why is this important?  You usually get 55 days from the statement open period to pay off the balance owing to avoid interest or to pay the minimum payment to avoid late fees.  A good idea is to set up an automatic transfer so you pay the entire balance owing on the actual due date of your statement. This way you can avoid any late fees and interest payments.  Plus, if you leave it until the due date to pay off your credit card, you can keep your own money sitting in any high interest savings account, or mortgage offset account, for the maximum amount of time so you can either reduce your home loan interest or optimise your savings. Keep in mind, your due date will change each month.

2. You don’t get 55 days interest-free – it’s ‘up to’ 55 days

For any purchase made in a given statement period, the interest free period is the number of days from the date of that purchase to the due date printed on your statement. So if you make a large purchase 2 days before the end of your statement period, you get two days interest free, plus the number of days until your due date for that purchase.

3. How to know when your payment is Due

The best way to know when your payment is due is to check your statement, each month. This is because the due date may not always fall on the same day each month.  We determine the Due Date based your statement open date plus 54 days, and if the Due Date were to fall on a weekend then the Due Date is the next working day of that Due Date.

3. The interest you pay depends on if you have paid your closing balance in full

Credit card providers require you to pay a minimum repayment amount each month.  This is simply to avoid late fees and keep you from defaulting.   However, if you don't pay your credit card in full by the due date each month, your interest-free period is usually no longer valid. The amount you owe will keep rolling over into the next statement period, with interest continuing to be calculated daily on each purchase that is still owing. 

With some household bills, if you miss a payment you can pay it off a couple of days later without any issues.  Your next bill may include a late payment fee, but that’s the extent of the damage.  However, with credit cards, you need to pay the total amount owing each month to avoid paying any interest. As soon as you miss your ‘Due Date’, you will not only be charged a late fee, but you will begin to be charged interest.  Your ‘interest free period’ is no longer valid.  It is a good idea to contact your bank, to enquire how you can regain interest free days on your purchases.

4. Be careful if you set up automatic transfers

You might get caught out if you set up automatic transfers for a particular date instead of the due date. For example, if you set up an automatic payment to pay off your credit card on the 10^th of each month; you may not make the payment in time due to the different number of days in the month.

Remember, the statement period starts on the same day each month.  It is a payment period that slightly moves depending on the number of days in the month.