If you pay off your credit card in full each month, a built-in feature lets you extend the time you have to pay for interest-free purchases. The secret? Something known as credit card grace period.
The grace period begins with the interval between the end of your credit card billing cycle and when payment is due. By law, your credit card statement must be made available to you no later than 21 days before the due date. This lets you 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. This is the date that your issuer added up all the transactions you made in the previous month and prepared to bill you for them. Any transactions you made after the closing date will appear on the next month’s invoice.
“When you pay your statement balance in full, you won’t pay finance charges for any purchases you made during that billing cycle. The card issuer basically loaned you money for free.“
If you pay your statement balance in full by the due date, you won’t be charged interest on any purchases you made during that billing cycle. The card issuer basically loaned you money for free for three weeks.
This only applies to purchases, by the way. Grace periods do not apply to credit card cash advances or when using checks provided by your credit card issuer. You will start earning interest immediately, and the interest rate may be higher than your credit card charges for outstanding balances.
What happens if you don’t pay your entire 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 keep a balance, your credit card issuer eliminates your grace period.
This means that not only will you pay interest on the outstanding balance from the previous billing cycle, but you will also start earning interest on new purchases. immediately after making them.
“When you keep a balance, your credit card issuer eliminates your grace period.“
The time it takes to restore your grace period through one-off full balance payments varies by credit card. You may need to pay your statement on time and in full for several consecutive billing cycles to recover a grace period.
If you end up with a balance most months, then interest will be a reality for you. In that case, look for a low interest card it can reduce how much you pay.
Understanding Grace Periods
Suppose your credit card billing cycle ends on the 1st of the month, and your due date is the 26th of the month. On or around the 1st day of the month, your card issuer generates your statement and sends it to you.
… then you will not pay interest on purchases on this statement …
… and purchases you make during the current billing cycle (i.e. anything after the 1st) will not bear interest until the due date of your following statement (the 26th of next month).
… you will be charged interest on the remaining balance …
… and any purchases you make during the current billing cycle will immediately start earning interest.
The 1st of the following month, the new billing cycle ends. Your card issuer sends you your next statement, with a due date of the 26th, and the process starts over. If you carried over a balance from the previous month, your grace period will have been eliminated. You will need to pay your statement balance in full to restore it.
Bottom Line: Pay your statement balance in full each month and you won’t be charged interest.
You can more than double your grace period
How to extend this free loan even more? By understanding your card’s grace period and, if possible, scheduling your purchases accordingly.
Obviously, you can’t always predict when you’ll need to spend. Repairing your car’s brakes or fixing your furnace in the winter can’t wait. But if you are planning, for example, when to buy airline tickets for your next vacation, you can plan the purchase so that you have even more time than the 21-day grace period to pay off your credit card. before incurring interest. .
If you make a large purchase right after your statement period closes, you have almost a month before that transaction appears on your bill – and then you have the official grace period. If you’re careful, you can pay off most big expenses with just a few paychecks, without paying interest and without dipping into your savings account.
“If you make a large purchase right after your statement period closes, you have almost a month before that transaction appears on your bill – and then you have the official grace period. “
For example, if your credit card billing cycle ends on the 24th of the month, you can purchase those airline tickets on the 25th. The next month’s billing cycle will end on the next 24th, and you will then have a grace period of 21 days, making the invoice due on the 15th or 16th of the following month. In the meantime, if you get paid on the 1st and 15th, you might have three or even four paychecks before you have to pay for the trip.
A word of warning
Any large purchase that you have not yet paid will use up your available money. If an urgent expense arises, you run the risk of not having money available to pay a big credit card bill. Keeping a separate savings account for emergencies only can help keep you from getting into debt.
If you can’t afford payment in full by the due date, make at least the minimum payment. You will start paying interest and lose the grace period, but you also won’t pay late fees and damage your credit.
“If you can’t afford payment in full by the due date, make at least the minimum payment.“
Understanding billing cycles can make it easier to schedule large purchases to take full advantage of your credit card grace period. Consider having a back-up plan in case you can’t pay your statement as quickly as expected.