I’ve received some questions lately about grace periods. What is a grace period? How does it work? How can I tell what type of grace period I have on my card? Quite frankly, most people are totally unaware of what a grace period is and what it means to them financially. A grace period is simply the period of time before a card issuer starts to charge you interest on your new purchases. Unlike a mortgage, which typically provides a 15 day grace period from the day the payment is due, credit card grace periods generally end on the payment due date.
Having a grace period of roughly 3 weeks before you start incurring interest charges might seem like a bit of a “free lunch”, but before getting too excited, there are several things to be aware of. First of all, there are several types of grace periods to understand with different calculation methods used. The type utilized will have a big impact on how beneficial, if at all, it ends up being for you.
There are 3 different types of grace periods typically used. First, the standard grace period, calculates your ”average daily balance“ to compute finance charges but also includes new purchases made on the card. You’ll be paying interest on those purchases from day one unless you’ve paid off your card balance from the previous month in its entirety. Second,, the full grace period, which is a rare feature on credit cards these days, calculates the average daily balance but excludes new purchases within the balance calculation, giving you the full benefit of the grace period whether or not your balance was paid in full in the previous month. And lastly, no grace period forces card holders to start paying interest on their purchases from day one regardless of whether or not their card balance was paid entirely in the prior month.
You can determine the type of grace period used for your card by looking at your card statement. You should focus on the language in your statement that talks about which balance calculation method is used. If your statement indicates a balance calculation that includes new purchases, you have a standard grace period. If the statement indicates that your balance calculation excludes new purchases, you have a full grace period. And if your statement indicates that you’ll start to incur finance charges from the date of each transaction, you don’t have any grace period at all.
The key to determining your type of grace period is identifying if new purchases are included or excluded. If your grace period includes new purchases and you don’t pay off your balance in full each month, you’ll lose the benefit of that grace period. If it excludes new purchases, you’ll enjoy the benefit of the grace period whether you pay off your balance in full or not.
Another thing to keep in mind regarding grace periods is the fact that credit cards, while typically offering a 20 to 25 day grace period, the clock starts ticking immediately upon the end of the billing cycle. For those customers waiting to get their bills in the mail, the grace period may be over by the time the bill arrives. “If your due date is only 20 days after the closing of the billing cycle,” said Consumer Action’s Linda Sherry, “the credit card company takes a couple of days to get your bill ready. It’s in the mail for up to four days, then you get it, then you’ve only got 7 to 10 days to turn it around and get it back to the company.”
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