Understanding a Credit Card Grace Period

What if we told you there is a way to get free loans from credit card issuers? It’s true! Most credit card agreements allow you free use of the issuer’s money for approximately three weeks before interest accrues on the loan.

That interval is called the grace period and if you pay off all purchases made during a given billing cycle within that window, you’ll pay no interest at all. Of course, there are caveats within this, which makes understanding a credit card grace period worthwhile.

Here’s what you need to know.

Each credit card statement contains a section entitled something along the lines of; “How Your Finance Charges Are Calculated.” In it, you will find the details defining the grace period your issuer offers.

This is the window of time between the statement’s closing date (the day the issuer totals up all of your purchases during a billing cycle) and the due date (the day payment is due for all of your purchases made during that billing cycle).

This period of time usually runs between 21 and 25 days. If you pay off all of the purchases you made during the billing cycle before the due date, you won't be charged interest on those purchases—assuming you have no existing balance.

Consider this example: You pay $120 for a compact refrigerator on October 18^th. Your credit card’s billing cycle closes on October 22^nd. The payment due date is November 5^th. You make no other purchases during that cycle and the card has no previous balance.

If you make a payment of $120 before 5 p.m. on November 5^th, no interest will be charged on the purchase of the compact refrigerator. If November 5^th falls on a weekend or a holiday, you’ll have until the next business day to satisfy the debt—interest-free.

It’s important to note grace periods do not usually apply to cash advances, balance transfers or checks the card issuer may provide (the use of which are essentially cash advances).

Also, if you’re carrying a balance from month to month, the grace period won’t apply, unless you pay the existing balance in full. Payments falling short of that amount will be applied to your total balance. The only way to take advantage of the grace period in that instance would be to pay the account off completely.

In other words, to avoid finance charges on a purchase altogether, you must either begin each new billing cycle with a zero balance—or pay it off along with the new purchase before the next due date.

Finance charges on an existing balance start on the day the billing cycle ends and stop the day you pay the obligation off in full.

However, if you pay the account off in the middle of a billing cycle, it’s possible to pay what you thought was the entire outstanding amount, but still be responsible for a small amount of finance charges when the next bill is issued.

If you then ignore subsequent statements—because you think you paid the bill off completely—interest and late fees will pile up on that trailing amount. Further, the issuer will consider those to be missed payments and report them to the credit agencies. This will lower your credit rating and cancel your grace period eligibility for the following billing cycles.

Always ask for an exact payoff amount.

Understanding a credit card grace period is key to avoiding finance charges on purchases. It also illustrates grace periods only apply to people who are capable of paying their balances in full each month.

The good news is if you have a lot of credit card debt and it’s becoming unmanageable, there are some alternatives to help you. One of these is working with a debt relief company to negotiate settlements to enable you to pay your cards off in full at a reduced rate.

Because there are a number of such companies out there, it’s important to seek information like these Freedom Debt Relief reviews to help you find a firm capable of serving you well.

Hopefully this guide has clarified some of the issues surrounding credit card grace periods. If you have questions or comments, please share them below.