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What does interest-free mean?
If you take out a loan or a credit card that’s ‘interest-free’, this simply means you won’t have to pay any interest to borrow the cash.
In most cases, this will only be for a set length of time. This is why you’ll often see this written as an interest-free period.
All credit cards have an interest-free period
You may not be aware of it, but all credit cards have a period where you won’t be charged any interest. Typically, this is around 56 days, but it depends on who issues your card.
As long as you clear your balance (repay what you spend) before this interest-free period ends, you shouldn’t have to pay a penny in interest – unless you use your card to take cash out. However, if you just pay part of it off, you have to pay interest on the entire balance.
This interest-free period is to give you enough time to read your statement and repay what you’ve spent. It’s a good idea to set up a Direct Debit to make this payment for you, as this way you don’t have to worry about missing or forgetting about it one month – which would have an impact on your credit history.
Some credit cards have longer interest-free periods
There are many different types of credit card out there, and some have promotional offers that you can benefit from when you spend on it.
Some of these promotional offers include interest-free periods that last for many months – with some even lasting over two years. You might see them advertised as 0% interest credit cards.
With this type of card, it’s possible to spend on it and not have to pay any interest until the promotional period ends. But if you go over your credit limit or break the card’s terms in another way – such as taking cash out at a cash machine – you might lose the interest-free period altogether.
Usually, the credit cards with the longest 0% interest periods are reserved for people with excellent credit histories. That’s not to say there aren’t cards out there with a smaller interest-free period, though.
The key thing to bear in mind when using this kind of card is that the interest rate may be very high when the promotional period ends. This is why it’s a good idea to aim to clear your balance in full before this date, as otherwise you could end up paying a lot in interest.
Credit cards aren’t the only things that offer this
You might also see loans advertised as interest-free.
For example, some furniture stores might offer you a couple of months’ interest-free credit. With this kind of borrowing, you usually get the item straight away for a small payment, but you don’t own it until you’ve paid its full value.
The interest-free period means you don’t have to pay interest for the time the lender states, but you’ll be charged their standard rate if the period ends and you haven’t repaid everything you owe.
Interest-free periods can be really useful if you keep on track of how much you owe and make regular payments. Used wisely, you can borrow for free and improve your credit history at the same time. But, missing a payment is bad news for your credit history and could lead to financial difficulty if the lender charges you for late payments.
To avoid this, always aim to clear your balance in full before the interest-free period ends. And, to be extra sure you’re not late making a payment, speak to your bank about setting up a Direct Debit.