Credit Card Grace Period Puts Interest on Hold

Understanding your billing cycle can help you time purchases and avoid finance charges.

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If you pay off your credit card in full each month, a built-in feature allows you to stretch out the time you have to pay for purchases without interest. The secret? Something known as the credit card grace period.

The grace period starts with the gap between the end of your credit card’s billing cycle and when the payment is due. By law, your credit card statement must be made available to you no later than 21 days before the due date. That allows you to know exactly how much you owe and gives you time to pay it off.

How billing cycles and grace periods work

Your monthly credit card statement will include the payment due date, of course. But about 21 days before that is the closing date, sometimes called the statement date. That’s the date on which your issuer added up all the transactions you made during the preceding month and prepared to bill you for them. Any transactions you made after the closing date will appear on next month’s bill.

When you pay your statement balance in full, you won’t pay finance charges for the purchases you made during that billing cycle. The card issuer has essentially loaned you money for free.

If you pay the balance on your statement in full by the due date, you won’t be charged interest for the purchases you made during that billing cycle. The card issuer has essentially loaned you money for free for three weeks.

This applies only to purchases, by the way. Grace periods do not apply to credit card cash advances, or when you use checks your credit card issuer provides. You’ll begin accruing interest immediately, and the interest rate may be higher than what your credit card charges for unpaid balances.

What happens if you don’t pay your full balance

If you don’t pay the amount you owe in full by the due date, you now have credit card debt and will be charged interest on the remaining balance. Perhaps more important:  When you carry a balance, your credit card issuer eliminates your grace period.

That means that not only will you pay interest on the unpaid balance from the previous billing cycle, but you’ll also begin to rack up interest on new purchases immediately after you make them.

When you carry a balance, your credit card issuer eliminates your grace period.

The time it takes to restore your grace period through on-time payments of the full balance varies by credit card. You may need to pay your statement on time and in full for several consecutive billing cycles to get a grace period back.

If you find yourself carrying a balance most months, then interest will be a fact of life for you. In that case, look for a low-interest card that can reduce how much you pay.

Understanding grace periods

Let's say your credit card's billing cycle ends on the 1st of the month, and your due date is the 26th of the month. On or about the 1st day of the month, your card issuer generates your statement and sends it to you.

  • If you pay the full balance shown on that statement by the 26th ...

... then you won't pay interest on the purchases on that statement ...

... and purchases you make during the current billing cycle (that is, everything after the 1st) will not accrue interest until the due date of your next statement (the 26th of next month).

  • If you pay less than the full balance shown on that statement, or you pay late ...

... you'll be charged interest on the remaining balance ...

... and purchases you make during the current billing cycle will start accruing interest immediately.

On the 1st of the next month, the new billing cycle ends. Your card issuer sends you your next statement, with a due date of the 26th, and the process begins all over. If you carried over a balance from the previous month, your grace period will have been eliminated. You'll have to pay your statement balance in full to restore it.

In short: Pay your full statement balance by the due every month, and you will never be charged interest.

You can more than double your grace period

How can you extend this free loan even longer? By understanding your card’s grace period and, if possible, timing your purchases accordingly.

Obviously, you can’t always predict when you’ll need to spend. Fixing the brakes on your car or repairing your furnace in the winter can't wait. But if you plan, say, when to buy the plane tickets for your next vacation, you can schedule the purchase in such a way that you have even longer than the 21-day grace period to pay off your credit card before you incur any interest.

If you make a big purchase right after your statement period closes, you have nearly a month before that transaction shows up on your bill — and then you have the official grace period after that. If you’re careful, you can pay off most big expenditures over a couple of paychecks, without being charged interest and without dipping into your savings account.

If you make a big purchase right after your statement period closes, you have nearly a month before that transaction shows up on your bill — and then you have the official grace period after that.

For example, if your credit card’s billing cycle closes on the 24th of the month, you might buy those plane tickets on the 25th. The next month’s billing cycle will end on the following 24th, and you’ll then have the 21-day grace period after that, making the bill due on either the 15th or 16th of the following month. In the meantime, if you get paid on the 1st and the 15th, you might have three or even four paychecks roll in before you have to pay for the trip.

A word of caution

Any major purchase that you haven’t paid off yet will tie up your available cash. If an emergency expense arises, you run the risk of not having money available to pay off a large credit card bill. Keeping a separate emergencies-only savings account can help keep you out of debt.

If you can’t afford the full payment by the due date, at least make the minimum payment. You’ll begin paying interest and lose the grace period, but you won’t also pay a late fee and damage your credit.

If you can’t afford the full payment by the due date, at least make the minimum payment.

Charging large amounts, while sometimes necessary, could increase your credit utilization ratio, or the amount of your total available credit that you use. This could negatively affect your credit score over time.

Understanding billing cycles can make it easier to time large purchases to take full advantage of your credit card’s grace period. Consider having a backup plan in case you can’t pay your statement off as quickly as you expected.