Your Grace Period Can Help You Save Hundreds on Finance Charges!

Most cardholders do not know what a grace period is, let alone understand how to use one to save money on finance charges. In this article, we explain how the grace period offered by your card-issuer can help you save as much as a couple of hundred dollars a year, or even more! 

A grace period is the length of time from the end of a billing cycle to the due date for that cycle. By consistently paying your balance in full, you can trigger a break on the interest charged by your credit card company on new purchases made during the ongoing billing cycle.

For example, let’s say that you purchased a new television for $400 on September 1, your billing cycle ends on September 15, and your due date is October 7. Further, let’s assume that you do not have any prior unpaid balances and you make no other purchases during that billing cycle. In that case, if you pay off the entire $400 on or before October 7, then your next bill will reflect a beginning balance of $0, thereby negating the need to pay any interest or finance charges.  

In other words, the grace period is an interest-free period, where the break in interest is extended to the day that you make the new purchase. However, this is applicable only if you pay off the entire balance every month. If you leave an unpaid balance on your card, then grace periods are meaningless, as interest charges on new purchases may start to accrue immediately. Moreover, if you don’t pay off your new balance in full, then interest and finance charges will usually commence from the date you first made the charge.

In the example given above, let’s assume that you have an earlier unpaid balance of $100. You make a payment of $400 on October 6 in order to pay off the new purchase. In that case, the issuer will bill you for finance charges on a balance of $500 for a 36-day period starting from September 1, and you’ll also have to pay finance charges on the remaining $100 from October 6 to the end of the billing cycle on October 15.

In case you’ve been carrying a balance, you may have to pay your balance on time, and in full, for two consecutive months before the issuer reinstates your grace period. Additionally, if you have an unpaid balance, some issuers may charge a “trailing interest” or “residual interest.” This charge builds up on your balance before you get an opportunity to pay it off, even if you pay the full amount shown on your statement. For example, let’s assume that the billing period ends on April 30, and your statement arrives in the mail on May 3, showing a balance of $1,200 (which consists of old and new purchases, as well as finance charges). In this case, even if you pay off the entire balance on the same day, you may be asked to pay trailing charges for the three days up to May 3. To avoid this, you can go online and check your full billing amount on the last day of the billing cycle, and then pay this balance immediately through an online bank transfer.

Card issuers are not obligated to offer a grace period. However, if you get one, ensure that you understand all the details by reading the terms and conditions of your card agreement carefully. Many card companies exclude cash advances, convenience checks and balance transfers from grace periods, and these start accruing interest immediately. Under the Card Act of 2009, issuers that do not provide a grace period are required to mail the bill to cardholders at least 21 days before their payment due date. Card companies cannot change the due date and consumers are permitted to make their payments until 5 p.m. on this day. If the due date falls on a weekend or holiday, the consumer can make a payment on the next business day.

Thus by utilizing the grace period offered by card companies wisely, consumers can get access to short-term interest-free loans. For those who need credit for a longer period of time, there are numerous banks and financial institutions that provide 0% interest business credit cards for 6, 9, 12 or even 18 months. Fund&Grow helps individuals or organizations utilize these offers in such a way that they can bypass fees and get low cost capital to invest in their businesses. If you need more information on this, call us at (800) 996-0270 and we’ll do what we can to help you achieve your financial goals.