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Credit Card Grace Period Puts Interest on Hold

Understanding your billing cycle can help you time purchases and avoid finance charges if you pay in full each month.
Oct. 1, 2018
Credit Card Basics, Credit Cards
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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 incurring interest. The secret? A little thing called a credit card grace period.

The grace period is 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, giving you the benefit of knowing exactly how much you owe and having some 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.

If you pay the balance off completely during your 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.

You won’t be charged interest between the closing date and the due date. 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 (the closing date) and ends on your payment due date. 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.

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 payment due date, you now have credit card debt and will be charged interest on the remaining balance. An added consequence you may not expect is that 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 charges on new purchases as 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 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.

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. Putting brakes on the car or fixing the 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.