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The Basics to Understanding Grace Periods

David Warner

David Warner

Financial Advisor

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If you are new to the credit industry and recently opened up a credit card, chances are, you are lost in the all of the numbers, rates, and terminology that is cleverly tossed at you. If that resonates – it’s normal and okay. Typically, much of the information could be considered “random” or “useless”. However, it serves a purpose to deter attention away from some of the most important terms and credit concepts, which are designed to help you out. Do you know what we are referencing?

Grace Periods.

This is a magical concept that rolls off the tongues of consumers and whispered by lenders, unless properly asked about. Sadly, not many people are aware of what grace periods are or how they work. In fact, the CARD Act Report shows that the majority of credit holders have no idea how important or useful grace periods may be. Today, we are going to discuss the basics to understand grace periods and how important this concept actually is. You might just find yourself saving more money than imagined.

 

What Are Grace Periods?

At the core, and simply stated, grace periods are a designated amount of time that the lender decides the approximant date between when your payment is due and the end of a billing cycle. Grace periods can be profoundly beneficial, only if you understand how to utilize them to your benefit. The most prominent impact and benefit of a grace period is that consumers will not be charged interest – or accrue any interest, during grace periods. However, consumers are required, by the fine print, to pay off the entire balance by the specific due date. If you pay off the entire balance, you will continue to receive the benefits of interest-free purchases and payments. If you only pay the minimum, not only will interest begin to accrue – you will also lose the benefits of grace periods.  We understand that this concept may be slightly confusing – this is why we are going to explain how the entire process works.

The Grace Period Process

Now that you have an understanding of what grace periods are, we are going to breakdown the process of how they operate on a daily basis.

  • John opens a new credit line and receives a limit of $1000.
  • John was given a billing cycle that ends on February 26th, 2017
  • Two days before the billing cycle closes, John spent $1000 on bills, groceries, and a new television.
  • Shortly after, John receives a payment notice and due date of March 22nd, 2017.
  • This information shows that John has an average of a 21-day grace period. In other words, John must pay $1000 to his credit card company to receive the benefits of no-interest payments or purchases. So,
    • If John pays $1000 by March 22nd, no interest can accrue
    • If John fails to pay $1000, interest will accrue on those purchases.

To make things a tad clearer, we highly suggest viewing grace periods as a whole -don’t try to itemize purchases as it will make things more complicated. Focus on paying off an entire credit card before the grace period payment date.

The truth is, most people who open credit cards are unaware of this policy and, as a result, lose the benefits of grace periods, effectively losing the privilege of interest-free balances. Now, if you have already lost your grace period – there are certain things that you can do, starting today, to restore it.

How to Restore a Grace Period

Let’s be honest here: if you are going to use a lender or open-up a credit line, spend the entire limit, don’t you think that the lender will want their money back? I mean, if you are going to give your friend $1000, wouldn’t you want that money back too? Many times, consumers do not look at credit in this fashion, stirring frustration, anger, and pointing blame at credit institutions. However, grace periods are in fact a beneficial service that these companies provide.  Grace periods serve, in our opinion, as a motivation to keep consumers on-top of their credit game, paying their bills, and avoiding interest charges at all times. The best part is, credit card companies, depending on the institution, will even let you reinstate your grace period.

To do so, the first thing you will need to do is contact your specific lending company. Ask them what their policies are surrounding grace periods, and if it’s possible to restore it. Typically, most credit card companies will restore a grace period only if the consumer pays off the entire balance for more than two-to-three months in a row. However, some companies may have added measures, or may not even offer this luxury. Our advice is to try to pay off your monthly balance each month to avoid this problem.

Use Your Grace Periods to Your Advantage

With the information we have presented thus far, you should have a better understanding as to what grace periods are and how they work. Now, this is only one part of grace periods: you must also learn how you can use grace periods to your advantage. While it’s not hard, it will take some practice to master. It’s essential that, in order to use a grace period to your advantage, you must know your lender’s policy near verbatim. Let’ review John’s situation:

  • Billing Cycle Ends on February 26th, next cycle begins February 27th.
  • Instead of spending $1000 before the 26th, or before the cycle ends, John can purposefully wait until February 27th. This is the brand new start of a 30 day cycle.
  • Given the grace period, typically 21 days, and the 30 days per billing cycle, John would have over 50 days to pay off the entire balance to maintain grace periods. In other words, if John works a standard full-time job, he could receive biweekly paychecks. With this strategy, John would have nearly 3 paychecks to pay off his credit card bill – all at which has ZERO interest.

This is just one strategic approach to taking advantage of grace periods. It’s imperative to contact your lender regarding their specify policies before crafting a game plan.

Minor Limitations to Be Aware Of

The last thing we want to mention is that there are minor limitations to where grace periods do not apply. These occasions are typically widely accepted and implanted by all lenders; however, be sure to communicate regarding limitations. Grace periods do not apply for individuals seeking convenience checks or cash advances.