A credit card grace period is the amount of time between when the credit card company tallies your purchases each month and the date your payment is due.
If used responsibly, your credit cards are a valuable tool to build credit and earn rewards. But most cards have a lesser-known benefit that is a big help for large purchases.
The trick is taking control of your billing cycle. Most cards have what’s called a grace period. It’s not like the extra days some mortgage lenders offer to get your monthly payment in. It’s simply the amount of time your card issuer gives you to pay your balance after the company tallies your purchases each month.
If you understand this cycle, then you’ll have an advantage when you’re shopping for big-ticket items (a widescreen TV, new car tires) or making a large payment with your card (your child’s tuition, a car down payment).
And if you don’t master your card’s grace period, your new but super-necessary refrigerator can easily cost you punishing interest charges.
What is a grace period?
Most people assume that if they don’t pay their balance in full, they will only start to be charged interest after the payment due date… wrong! Others assume that if you make a partial payment of your balance by the payment due date, they will only be charged on the unpaid portion of the balance, from the time of their purchase… wrong again! In fact, if you don’t pay off your balance in full by the payment due date, you will be charged interest all the way back to the purchase transaction date for the entire balance – even if you make a partial payment! Let’s use an example:
- You buy a sofa for $1,200 on February 21 with your rewards credit card
- The billing cycle ends on March 16, and the payment due date is April 6
- You pay $1,000 April 1 and the balance of $200 on April 10
You’re thinking, fantastic, I’m only going to be charged interest on the $200 for the four days in which you carried a balance past the payment due date. Guess what? You’re in for a nasty surprise. Because you did not pay off you’re balance in full, you’re actually going to be charged interest on the full $1,200 for the 52 days from your date of purchase to the payment due date. Then, in addition to that, you’ll be charged interest for an additional four days on the $200 you paid off between the payment due date and the date you paid off your balance in full.
How a credit card grace period works
The grace period is a period of time where you will not be charged interest on your credit card balance, if you pay the balance off in full by the payment due date. The grace period starts on the last day of your monthly billing period. Every Canadian credit card offers a minimum grace period of at least 21 days from the close of your billing period. It ends when the payment date is due.
The thing to remember is that your most recent charges don’t accumulate interest during that stretch of several weeks or more — as long as you pay off your balance each month.
Credit card companies aren’t required to offer a grace period, but nearly all do for people who pay their bills in full.
How to use credit card grace periods to your advantage
The best way to maximize your grace period is to use your credit card for large purchases at the very beginning of your billing cycle. So learn what day your bank counts up your charges and buy that fridge in the days right afterward.
Depending on the length of your grace period, you’ll have nearly the full billing cycle of about a month, plus the grace period of several weeks or more. That could give you close to two full months to pay off your balance without any interest, allowing a bit more financial flexibility when planning your budget.
During that window, you might have an additional payday or two before your bill is due, giving you time to build up cash to pay off that purchase. That extra time can come in handy if you face a surprise car repair bill when you need to pay for that new TV.
Remember: Any balance left over after your grace period will build interest.
The grace period perk is especially helpful when you have a new credit card and you’re trying to meet the requirements for a welcome offer. You maximize the value of your credit card bonus or rewards program when you aren’t offsetting it by paying interest.
Pay your full balance to keep your payoff cushion
To keep the longer payoff window that a grace period provides and avoid interest on your purchases, you do need to pay the full balance. If you carry a balance and just pay the minimum, you may lose your grace period for new purchases.
This means you’re not only charged interest sooner for purchases, but you’re also charged interest on the unpaid balance. To restore your interest-free grace period, you likely will have to pay your bill in full and on time for several consecutive billing cycles, depending on your credit card’s rules.
More ways to stretch your dollars
- Don’t miss savings on your car. While you’re in the mindset of finding new ways to save on your monthly bills, do a quick review of your car insurance rate to avoid overpaying by hundreds of dollars a year. The same kind of simple comparison shopping could help you save when you renew or buy homeowners insurance.
- Dig out of credit card debt. If you’re trying to get back to paying off your credit cards each month, find out how to combine your balances by using a personal loan to put your debt behind you faster. You’ll get one monthly payment with lower interest.
- Don’t underestimate the power of spare change. What if you gathered up the cents leftover from your everyday purchases and used them to start investing or add a little extra to your retirement savings? Here’s how you can invest your “spare change.”
- Refinance your mortgage. Another good way to generate cash to pay off credit cards is to refinance your mortgage.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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