Credit cards sometimes get a bad rap because of their high interest rates. But what if we told you there’s a way to use your card without paying interest? This is thanks to an often overlooked feature known as the “grace period.”
Of all lending products in the country, credit cards carry the highest interest — a whopping 14.65% average according to the Federal Reserve. However, it’s not necessarily true that you’re always on the hook for it.
John Ulzheimer, a credit expert, formerly of FICO and Equifax, explains that paying interest on the much-maligned high-interest credit card is entirely optional... if your credit card has a grace period.
“With car loans, it's not optional, with mortgages, is not optional,” Ulzheimer says. “Every extension of credit has some sort of interest automatically applied to it, except for credit cards. If you pay it in full, then your interest rate is irrelevant because you will not be paying it at all,” he adds.
Here’s how it works.
Understanding your credit card grace period
A credit card grace period is the window of time when you can make purchases on your card and avoid paying interest.
Typically this is between the end of your billing cycle and the date on which your payment is due. During this time, any purchases you make are interest-free, as long as you pay the balance in full each month by the payment due date.
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 states that credit card companies must give you a minimum of 21 days from the date your statement is generated to pay your bill. So if your credit card has a grace period, you’ll have a minimum of three weeks to take advantage of it.
However, each company has its own grace period. So, you may have more than the minimum 21 days to pay off your purchases without incurring interest.
“Think of it as a period of time where the debt that you have incurred with your card is free,” says Ulzheimer.
It’s important to highlight that credit card grace periods only apply to new purchases and only if the previous balance was paid in full. If you request a cash advance or non-0% balance transfer, interest will begin accruing from the date the transaction is posted.
If you do happen to get a 0% balance transfer, keep in mind that the 0% APR will expire after 12 to 18 months, depending on the terms. After this period, any remaining balance will be charged an ordinary interest rate, according to your card’s agreement.
Another thing worth noting is that grace periods are not required by law, and there are some cards that do not offer them. This is why Ulzheimer recommends checking your credit card agreement online or calling the card issuer, to make sure it’s available to you.
How to take full advantage of your credit card grace period
Now that we’ve discussed what a credit card grace period is and what it applies to, it’s time to talk about how you can make the most out of this feature.
Let’s say that your billing cycle ends on December 11, and your payment is due on January 6. If You purchase a $600 fridge on December 9 (before your statement closes), that means you’ll have 28 days to pay it off without incurring any interest, if you’re not carrying a balance.
But if you purchase that same fridge on December 12 (the day after your closing date), this transaction won't show up until your next statement, which will be due on February 6. This means you'll have 56 days to pay it off interest-free, as long as you pay your balance in full.
What you should be aware of regarding your grace period
The first thing you need to be aware of is that while credit card grace periods do give you some leeway to make purchases without paying interest, they are not an extension of your payment due date.
If you don’t pay your bill on time, you’ll be charged a late payment fee and your interest rate could increase by as much as 10%, according to Rod Griffin, Senior Director of Public Education and Advocacy at Experian.
Additionally, credit card grace periods are only available as long as you pay off your balance each month in full and your account is in good standing.
If you don’t pay the full amount owed, pay late, or miss a payment, you will lose your credit card grace period. This means that any remaining balance will be charged interest, and any new purchases will start accruing interest right away.
But if you lose it, don’t fret. You can always get the grace period back after paying off your card’s balance for two consecutive months.
Benefits of using a credit card vs paying cash
With all this talk about credit cards and grace periods, hasn’t it always been more financially responsible to pay cash and not spend what you don't have? Well, not necessarily.
Griffin says that using your credit card for things you need to pay for anyway, such as a subscription or your utilities, can actually offer a unique set of benefits.
Credit cards affect multiple factors of your credit score, including the two most important ones: payment history and amounts owed. This is why they’re an excellent tool to both establish or rebuild your credit.
“If you're paying your bills on time and you're keeping your credit card balances low, you're going to have a good credit score,” Griffin says. “Those two things (payment history and amounts owed), depending on the scoring system, impact between 60% and 70% of your score,” he adds.
Besides helping you boost your credit, most credit cards offer perks, like in-store discounts, cash back, or rewards points. “You're saving money, you're not paying any interest (if used during the grace period), and you're building your credit history,” Griffin says.