Credit Card Basics: 6 Things You Need to Know About Grace Periods
By Eva Norlyk Smith, Ph.D.
December 8, 2009
The grace period is one of the great benefits of credit cards. It is an interest-free period, which card issuers extend as a courtesy before they start charging interest on new purchases. You can avoid paying any credit card interest at all, if you always pay off your credit card balance in full by the due date.
The grace period essentially lets you borrow money for free, even if it’s just for a short while, typically around 21 days. It enables you to consolidate lots of little purchases into one single payment, which is more convenient than having to write checks for every single purchase.
The length of the grace periods varies between card issuers, and not all credit cards offer a grace period. Here are six important points you need to know to make the most out of the grace period on your credit cards.
1. The grace period only applies when you’ve paid the balance from your previous statement in full. One of the great disadvantages of carrying a balance over from last month is that you effectively eliminate your grace period. As a result, you won’t just be paying interest on the charges from last month, once you carry a balance over, interest will begin to accrue from day one on all new purchases as well.
2. The grace periods usually only applies to purchases. Balance transfers and cash advances generally start earning interest right away at their respective APRs.
3. Paying late wipes out your grace period. Paying late has the same effect as not paying your statement balance in full. Payments must be received by the payment due date, or you won’t just get whacked with a late payment fee, you will also be charged interest on all your charges for that month, and new charges will accrue interest from day one.
4. Don’t confuse account balance with the statement balance. If you pay online, it’s easy to confuse the account balance for the statement balance and pay more than you have to. When you pay online, there are generally three amounts listed: the minimum due, the statement balance at the closing of the previous billing cycle, and the current account balance. The current account balance includes both last month’s statement balance plus any new charges you have made after the closing of the billing statement. It’s easy to get confused and think you have to pay the highest amount. However, you just need to pay the amount listed as the statement balance at the closing of last month’s billing cycle.
5. To reinstate your grace period, you must zero out your account. Once you lose your grace period, it’s not enough to pay off the previous month’s statement balance in full. You won’t regain the grace period until you zero out the account by paying off the current account balance in full.
6. Not all cards have a grace period. While most credit cards exclude the grace period on balance transfers and cash advances, some cards don’t even have a grace period for purchases. This is often the case for credit cards for people with bad credit, including secured credit cards.