Credit card issuers are very upfront with the features that attract new customers. Things like signup bonuses, category bonuses, or special financing are essentially marketing tactics to drive new business. What card issuers are not always the best at doing, is explaining everything you can find in the fine print. These are the things that can have a big impact on your finances.
Grace periods have long been used within the credit card industry, but most people don’t really understand what they are and how they can work for you or against you. Understanding how credit card companies use grace periods can mean the difference in hundreds if not thousands of dollars in interest out of your pocket each year.
What Is a Grace Period?
A grace period is the time from when your credit card billing statement closes until when your payment is due. This is usually anywhere from 21 to 27 days. To help you understand this a little more, let’s look deeper into how credit card billing cycles work.
Each month, when you receive your credit card statement, in addition to the bill’s due date, you will see a date that is generally labeled as the “statement date” or “closing date”. What the card company will do is total all the purchases made from the previous closing date to the current closing date and bill you for them. Let’s assume your statement’s closing date is November 7, any purchase that you make on November 8 or after will be part of the next billing cycle.
During this grace period, you’re not going to be paying interest. Think of it like your credit card company extending you a complimentary line of credit for a few weeks. However, if you do either of the following two things, interest will start accruing immediately:
- You only pay a portion of the total amount due by the due date.
- You pay the entire balance, but only after the due date has passed.
If this happens to you, it’s important to know that interest won’t just start accruing from the statement’s due date, it will actually accrue all the way back to the purchase dates of each item.
A Two-Month Grace Period?
Now that you know exactly what the grace period is, what if someone told you that you could extend it to nearly two months? It’s possible and not all that difficult to accomplish. Plus, if you are planning to make a large purchase and want to little extra time to pay off the balance, then this could be an extremely useful tactic.
Because your credit card billing month starts over the day after your statement closes, the trick it to make your purchases as close to that date as possible. Let’s say that your statement closed on November 2 and you bought a new television on November 3. Your next statement, which includes the television purchase, would close on December 2 and you would have a due date of approximately December 23. That means you would have nearly two months from the time you bought your new television until when you would face possible interest on the purchase. (Note: If you’re looking to avoid interest for a longer period of time, you might want to consider a balance transfer credit card.)
Remember, while the strategy can be helpful in avoiding interest on a big purchase, it’s not an excuse to overspend. Credit cards are best leveraged when they’re paid off in full by each due date. Otherwise, as we mentioned, you’ll start to accrue interest, which can add up quickly, damaging your overall financial health and your credit. (The amount of debt you owe plays a major role among credit scores. You can see how your debt levels are affecting your credit by viewing your free credit report snapshot, updated every 14 days, on Credit.com.)
Also, anyone looking to properly manage their debt needs to have a good understanding of grace periods. Credit card companies are not required to have a grace period and some do not. If they do, the CARD Act of 2009 requires your statement must be mailed or delivered to you at least 21 days before the due date. Make sure you read the fine print for your credit card so that you can fully understand how your card works and what actions may nullify your grace period, if you do have one. It could save you a lot of money in the long run.