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Credit Card Grace Period Puts Interest on Hold

August 26, 2015
Credit Card Basics, Credit Cards
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Even if you pay off your credit card in full each month, you can still use it to stretch out the time you have to pay for purchases without incurring interest. The secret? A little thing called a credit card grace period.

The grace period is the gap between when your credit card’s billing cycle closes and when the bill comes due. Depending on how you time a credit card purchase, you could have more than 50 days to pay before you have to think about interest by taking advantage of the grace period.

Here’s how it works.

Know your credit card’s billing cycle

If you take a look at your most recent credit card statement, you’ll see 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.

You won’t be charged interest between the closing date and the date the bill is due. If you pay the balance off completely during that grace period, you won’t pay any finance charges for the purchases you made during that billing cycle. The card issuer has essentially loaned you money for free for three weeks.

Here’s an example. You make a purchase on the 22nd of the month, and your credit card’s billing cycle closes on the 24th. The 21-day grace period starts on the 24th. If you pay the entire purchase off before the grace period ends, you will pay no interest on the money you borrowed to make the purchase.

But the grace period can get even better.

More than double your grace period

Sometimes you need to make big purchases immediately, no matter what time of the month it is. Putting brakes on the car can’t wait, and neither can fixing the furnace in the winter. 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.

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

If you’ve got a big credit card bill hanging over your head, it can be even more devastating to run into a true emergency that sucks up all your available cash. It’s best to have a solid plan for how you’re going to pay the balance off and to line up a contingency plan in case something catastrophic happens.

Even if you can’t pay the entire balance, making at least the minimum payment before the due date should be a priority. That way, your credit won’t be damaged by a late payment, and you won’t have to worry about paying a late fee.

Also, some card issuers will give you a grace period only if your balance was paid in full the previous month.

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

Virginia C. McGuire is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @vcmcguire.

Image via iStock.