How Do Credit Cards and Grace Periods Work?
When you charge items on credit cards, the issuer doesn’t immediately charge interest on your purchase — you have a “grace period.”
This grace period is the number of days you have to pay your balance in full without incurring any finance charges. The grace period generally ranges from 21 to 25 days, and is the period of time between the end of a billing cycle and the “due date” on your monthly statement.
An Interest Free Loan
So when you pay your bill in full during the grace period, you basically get an interest-free loan from your credit card issuer. This is the responsible way to use a credit card. Now, if you carry a balance from month to month, you don’t get a grace period anymore because you’re being charged daily interest on your balance.
When you carry a balance, you not only lose out on the grace period, but you can also easily slip into credit card debt. The effects of compound interest can sneak up on you. Your debt that once looked manageable will morph into a much larger debt as time goes by. So taking advantage of the grace period by paying your entire balance every month also keeps you from getting into debt.
Not All Credit Cards Offer a Grace Period
Do all credit cards have a grace period? No, they don’t, unfortunately. The best ones do, but you’ll find that some cards that target fair or bad credit do not offer a grace period. You can find out if a credit card has a grace period by checking the rates and fees listed in the Schumer Box. The Schumer Box is, quite literally, a box in the “Terms and Conditions” section that tells you the purchase APR, details of balance transfer offers, the grace period, minimum interest payments, and much more.
You need to know that the Credit CARD Act of 2009 does not require issuers to have a grace period. But the CARD Act requires credit card issuers who do offer grace periods to mail statements at least 21 days before the due date. This gives cardholders a chance to take advantage of grace periods. Note that business credit cards are not covered by the CARD Act, so issuers of business credit cards do not have to follow this requirement.
Cash Advances Are Different
There’s one more important thing you need to know about grace periods: The grace period refers to purchases, not to cash advances. You do not get a grace period with a cash advance. In fact, the interest starts accruing right away. For example, if you get a $1,000 cash advance, you’ll pay interest on that amount as soon as it’s posted to your account. So if you have an 18.99 percent purchase APR on the credit card that you used, you’ll be paying 18.99 percent interest on that $1,000 right away. This is one of those nuggets hidden in the fine print, so be aware of this.
The bottom line is that if you make it a habit to always take advantage of your credit card’s grace period, you’ll be in good shape. You’ll be using your cards responsibly and staying out of debt. And if you never pay interest expense and you use rewards credit cards, you can even make a profit from your cards.