Why Do Credit Card Companies Give You 30 Days To Pay Them Back?

If you make credit card purchases on day 1 of your billing cycle, you have 30 days to pay off your balance.

Credit card companies are willing to give you a month-long, interest-free loan — if you pay on time and in full.

Why do credit card companies allow that to happen instead of charging interest right away? That’s what a listener of the Clark Howard Podcast recently asked.

Why Do Credit Card Companies Give You (30-Day) Interest-Free Loans?

Credit card companies willingly hand out 30-day interest-free loans. Why is that?

That’s what a listener wanted to know on the July 25 podcast episode.

Asked Greg in California: “Why do credit card companies give a grace period? Why doesn’t the interest start accruing on the day you make a purchase?”

Outside of the fact that “it’s always been that way,” credit card companies are not as generous as this makes them sound. If everyone paid their balances in full at the end of each 30-day cycle, they’d go out of business — or perhaps start charging us interest every day.

Unfortunately, they make enough money on people who carry credit card debt every month.

“Why do you get a grace period? So there’s a tradition going back long, long ago, not just here in the United States, of having what are called net payment dates,” Clark says.

“Net 10, net 15, net 20, net 30. It’s a period of time that an invoice is expected to be paid. And there’s no penalty or interest as long as you pay under the terms of the net 10 to 30 days.

“Credit card companies are net 30. So it’s an enormous benefit. I think about 45% of Americans run no balance on a credit card. The bill comes in, they have that net 30 period and they pay the balance in full. And you are living off the bank or credit union’s money interest-free.

“However, you leave any money unpaid on that, what happens? Well, interest accrues moving forward. And any future charges are all subject to interest at the highest rates we have ever had on credit cards. So the system is so tilted toward those of us who pay our balances in full who are being subsidized by those who can’t or don’t pay their balances in full.”

Final Thoughts

According to Forbes, the average credit card rate is 24.52%. That’s almost an absurd number. When combined with minimum payments, relatively little credit card debt can do some major damage to your finances for a long time.

Make sure you take advantage of the fact that credit card companies operate on a net 30 system. For more, here are Clark’s seven rules for using credit cards effectively.