A credit card's grace period can be defined as a period of time during which the cardholder is not charged interest on a balance, typically lasting at least 21 days. That said, a grace period does not help cardholders who carry balances from month to month, as interest will begin to accrue immediately after a new purchase is made.
Below, we'll explore grace periods in detail to show you exactly how they work, and why it's so important to pay your credit card balances in full each month.
Grace periods defined
One way to think about a grace period is that it is the length of time between when your statement closes for the month, and when the bill is due for that statement.
I recently received a statement for my personal credit card showing all the charges I made from July 13 to Aug. 12. My payment for this statement period is due on Sept. 9. The 28-day period between the end of the billing cycle (Aug. 12) and payment due date (Sept. 9) is the grace period. As long as I pay my statement balance in full by the due date, I won't be charged interest on any of my purchases.
Grace periods can be advantageous for people who pay their credit card bills in full each month. In effect, my credit card's grace period allowed me to finance my purchases for as many as 58 days (the period between when the statement period began on July 13 and when the bill is due on Sept. 9) completely free of any interest charges. That's nearly 2 full months of interest-free financing provided by my credit card's grace period, on top of the travel rewards I earned on each dollar of spending.
If you time your purchases well, you can effectively borrow money for several weeks at no cost thanks to a long grace period on credit cards.
How to see if you have a grace period
Most credit cards have grace periods that benefit cardholders when they pay in full, but they aren't always clearly labeled in the terms and conditions of a credit card offer.
Below, I highlighted a portion of a credit card offer that explains its grace period. Note that it doesn't specifically reference a grace period in plain language. (This text box is standard for a credit card.)
For illustrative purposes only
Image source: Card offer edited by the author.
Grace periods aren't always clearly defined.
This particular card has a grace period of at least 21 days on new purchases if the balance is paid in full each month. However, there is no grace period for balance transfers or cash advances, thus interest will begin to accrue immediately when a balance is transferred or when the cardholder uses their card for a cash advance. Most credit cards do not have grace periods for cash advances or balance transfers, which is why it's best to avoid cash advances and to transfer balances only when you can get a 0% promo annual percentage rate (APR).
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 requires that if a card has a grace period, it must be at least 21 days in length. Thus, many cards have grace periods and disclose that the grace period extends for at least 21 days.
What happens if you don't pay in full?
Grace periods are only beneficial to the extent you pay your statement balance in full and on time each month. In many cases, grace periods do not come into effect when a cardholder carries a balance from month to month. If you carry a balance over into the next month, interest on new purchases will accrue immediately.
Suppose I had a $100 balance carried over at the beginning of my billing cycle, which started on July 13. Interest is already piling up on that balance each day, which isn't surprising. However, what many people don't realize is that each subsequent purchase during the July billing cycle will be charged interest simply because I carried a balance at the beginning of the statement period.
This is a very tricky way for credit cards to collect more interest from people who are already carrying balances. If I charged $2,000 to my credit card in a month in which I carried over a $100 balance, I could easily have $30 or more in finance charges on my new purchases of $2,000, in addition, to finance charges on the $100 balance I carried over.
For this reason, it is very important to pay off credit cards in full each month. If you carried a balance on a card over to the next month, new purchases should be put on a different card that did not have a balance carried over, so as to benefit from the grace period. As an alternative, credit cards with 0% promo APRs on purchases can be a good choice for scoring zero-interest financing, as can balance transfer credit cards, but you'll generally have to open a new credit card account to qualify for either promotion. Thus, it's not always a feasible solution if you didn't foresee having to carry a balance in the first place.
Getting back in good graces
One thing to know is that if you carry a balance over into a new month, you'll typically have to pay the balance in full twice before you start to benefit from the grace period again.
Thus, if you carry a balance from April into your May billing cycle, then make a few purchases in May, you'll be charged interest on your April purchases on the May statement. On the June statement, you'll be charged interest on the new purchases you made in May because you no longer have the benefit of a grace period. Only after paying the May and June statements in full will you start to benefit from the grace period once again.
If this is all very confusing... well, a cynical view might be that it's somewhat by design. Credit card companies benefit by eliminating grace periods when people carry balances in order to maximize the interest they earn on their clients' outstanding balances.
Luckily, as confusing as grace periods can be, the solution to the problem isn't confusing at all: Pay your credit card balances in full and on time every time and you'll never, ever pay a dime in interest on your credit card. For this reason—among many others—falling into a trap of high-interest credit card debt is very often easier than getting back out.
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