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If you’ve ever read the terms of disclosures section of your credit card statements (and you should!), you might see that your credit card has a “grace period.” It’s common for some of the better credit cards, like Discover More and American Express, to have a 25-day grace period. But what does this mean — and how can it save you money?
Defining a Grace Period
A credit card grace period is a length of time where you won’t be charged interest on any new balances on your credit card. In other words, if you charge $100 on your credit card with a 25-day grace period, and then pay off that $100 dollars before 25 days into your billing cycle, (not 25 days from when you make the charge) you won’t pay any interest on that money.
Some credit card policies state that the grace period exists only if you pay your balance in full each month. So, if you charge $100 one month, and then make a payment of $50 when your next payment is due, your average daily balance will be calculated based on the full amount charged, with no grace period for the new charge.
Your read that correctly: if you do not pay your balance in full before your card’s grace period ends, you will be charged interest going all the way back to when your purchases were made.
Additionally, if you charge another $100 the next month, you’ll pay interest on your average daily balance and won’t enjoy any grace period since you didn’t pay your balance in full the previous month.
Grace periods are typically only available for new purchases, not for cash advances or balance transfers. You will begin paying finance charges on cash advances and balance transfers as soon as the transaction posts.
How the Credit CARD Act of 2009 Affects Grace Periods
The Credit CARD Act of 2009 mandated that any credit cards with a grace period must have a grace period of at least 21 days. Many credit cards offer grace periods between 21 and 25 days. You can have no grace period at all, or a grace period of 21 days, but not a grace period of 14 days (for instance), by law.
Additionally, if your credit card has a grace period, your credit card company is required to mail your billing statement at least 21 days before the grace period ends and finance charges would be added to your balance.
Should You Look for a Grace Period When You Apply for a New Credit Card?
It’s always good to find a credit card with a grace period — the longer the better. However, if you intend to pay off your balance every month (which you should), then it’s critical to find a credit card with a grace period, that way you can avoid finance charges while enjoying all the benefits of using a credit card, including convenience, an easy-to-access record of your transactions, extended warranty protection, and maybe even cash rewards!
Loans and Grace Periods
A credit card grace period should not be confused with the grace period on a loan, mortgage or utility bill. A grace period in regard to loans or bills is an amount of time in which you can make your payment after the due date, but won’t accrue any penalties.
Some utility bills, car loans, and other payment plans have a grace period of five days or more. During that time, you can make a payment without:
- having the loan go into default
- having the loan canceled
- incurring late fees
Any questions about credit card or loan grace periods? Please post them below — we’re happy to help!