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With inflation reaching its highest point in a decade and consumer prices increasing by around 6% this year, many people are looking for ways to avoid extra charges on their credit cards and better manage cost-of-living pressures.
As interest rates rise, credit card interest rates are increasing too — a competitive rate is typically around 15%. This is much higher than the interest rate percentage for a mortgages or car loans. Why? The risks for the lender are higher. If someone defaults on a mortgage, the bank can take the house. When it comes to credit card debt, there is no security to leverage.
However an increasing number of people find credit card interest rates unpalatable, especially as alternative borrowing models become available.
Interest free credit cards have emerged as a way for traditional lenders to scrape back some market share from the new buy now, pay later (BNPL) model, which has exploded in popularity.
“Younger generations are walking away from traditional credit cards and lenders therefore had to find an alternative to counteract the move to the Buy Now Pay Later schemes,” says Jennifer Richardson, an accountant and financial planner who runs financial literacy program Got Money Honey.
Those without good financial management can still find themselves in difficulty if spending goes unchecked on an interest-free credit card.
“Interest free credit cards are popular because they give consumers the ability to source funds for purchases that they otherwise may not be able to buy upfront, but without paying interest,” says Richardson.
Interest free credit cards can be more convenient than applying for a personal loan and waiting for it to be approved.
Unlike BNPL, credit cards are regulated by the government so there are inbuilt credit checks to prevent people taking out credit with existing debt issues.
Interest free credit cards may also have rewards programs for timely repayments, which BNPL do not offer.
How do Interest Free Credit Cards Work?
Unlike regular credit cards, an interest free credit card offers a set period of time when no interest is charged on a new purchase. It continues as long as the closing balance is paid in full by the due date every month.
Compare this to regular credit cards, which have an interest rate that generally starts from 13%. The lowest interest rate is around 7.5% and it can stretch to 20%.
Many credit cards begin with a 55-day interest free period. Very few have a no interest period that lasts forever. Those that do, come with high monthly fees and other conditions.
Even if the cardholder isn’t paying interest, lenders can still make money because the retailer pays them a percentage of each sale. It is therefore better to offer a customer an interest free credit card than to lose their business to BNPL.
Interest free credit cards are in the minority compared with regular cards, and public awareness about their existence remains fairly low, according to Richardson.
Examples of Interest Free Credit Cards
There are a number of different types, including:
0% purchase rate offers
This means that the cardholder is charged no interest on purchases, regardless of whether the balance is paid in full.
Minimum repayments must still be made, as is the case for all types of credit cards.
Once the interest free period is up, the interest rate can be “exorbitant,” says Richardson.
“And if you don’t pay the minimum amount due, the interest is charged back from the date when you purchased the product, not when the payment was due.”
It is also important to note that the period set is a maximum period. If you purchase something the day before the interest free period expires, there is only one day to pay it.
“It’s a progressively decreasing interest free period,” says Richardson.
0% balance transfer offers
“A balance transfer is when someone with massive credit card debts that they can’t get on top of can roll the debts into another provider who offers an interest free period,” says Richardson.
The interest free period typically ranges from 14 months up to three years.
“The problem is that people get the credit card and don’t realise that it’s only the balance transfer that’s interest free,” says Richardson.
“If you go and purchase something next week, you pay interest from the day that you purchased it. If someone pays, say $200 off their card, the $200 doesn’t come off your purchases. It comes off your balance transfer. You are all of a sudden paying interest again, but it’s on those new purchases.”
It’s worth noting that if you haven’t been able to pay off all the debt by the end of the interest free period, it is possible to roll the smaller debt into another balance transfer to obtain the benefits of no interest.
“But you’ve got to remember that every time you apply for credit, it will show on your credit score. If you do that a lot, it suggests to lenders that you are not financially responsible,” says Richardson. You can read more about balance transfer cards via our guide.
Lifetime 0% interest cards
Very few cards offer no interest for the lifetime of the card. If you do have a card that is permanently interest free, the monthly minimum repayments must still be paid to avoid incurring any interest charges.
These cards will have high monthly fees. It usually a percentage of the credit limit – say, $10 for a $1000 credit limit and $20 for a $2000 credit limit, and so on.
How to Compare Cards
“When comparing credit cards, you’ve really got to look closely at the fine print,” says Richardson.
She suggests making columns for each option, with the length of the interest free period, the monthly charges, what the interest rate reverts to, and if there’s any rewards programs available for timely repayments.
Frequently Asked Questions (FAQs)
Can you get a credit card without interest?
Yes, it is possible – but the interest free period tends not to last forever.
There are different options, including 0% purchase rate offers, 0% balance transfer offers and lifetime 0% interest cards to choose from.
What is the best interest free credit card?
Jennifer Richardson, an accountant and financial planner who runs financial literacy program Got Money Honey says her top pick is the Coles interest free credit card, because it has no annual fees and a-15 month interest free period balance transfer.
“It does revert after the 15 months to 19.99%, but that’s not too bad considering some of them are 23%,” she says.
Her second favourite is Kogan’s interest free credit card, which comes with a 30 months interest free balance transfer. However, be aware that these cards may not be suited for your financial situation and the best card for you may not be that best card for someone else.
What happens if I don't repay my balance on an interest-free credit card?
Accountant and financial planner, Jennifer Richardson, says: “If it’s in the interest free period, nothing really happens except for incurring a default payment charge.
“The lender won’t remove the interest free period or anything. But you will get a default payment charge noted on your credit file and if you later want to get a home loan, a car loan or another credit, your file will show that you defaulted on a payment.”
