How Your Grace Period Can Save You from Credit Card Debt

Grace periods are one of the most appealing attributes of credit cards. They allow you to buy what you need now and pay it off later , interest free. But if you don’t know the specific terms of your card’s grace period, you could get stuck with interest charges.

What Is a Grace Period?

A grace period is the window of time between when your credit card billing period ends and when payment on your balance is due. You won’t be charged interest as long as you pay the balance in full by your due date. After the due date, any remaining balance will begin to accrue interest, so if you’d rather not pay to borrow, pay your balance in full during the grace period.

While grace periods offer an opportunity to temporarily spend on a credit card issuer’s tab, you could have to pay interest if you’re not careful. Credit card issuers “know that even if people are intending to pay their bill in full, they’re probably going to make a mistake or not have it all — and then [issuers] get to charge an exorbitant rate of interest,” says Alexander Lowry, professor of finance and executive director of the Master of Science in Financial Analysis program at Gordon College in Massachusetts.

With an average variable credit card annual percentage rate close to 17 percent, according to Experian, carrying a balance can become an expensive habit, too.

[Read: The Best Rewards Credit Cards of 2018.]

Five Things to Know About Grace Periods

Grace periods don’t apply to every type of credit card charge, and they can be revoked if you carry a balance month to month. If you don’t know the rules of grace periods, you could end up paying interest.

You should understand these components of grace periods.

They give you time to pay for purchases interest free. “If you make a large purchase right after the closing date of the current billing cycle, a grace period can allow you to avoid interest for almost two months,” says Gerri Detweiler, education director for Nav, a business credit and financing resource. The purchase “won’t show up until your next [month’s] bill. That gives you more time to pay, and as long as you pay off your balances in full, you’ll avoid interest.”

Hurdling interest definitely makes it easier to stay out of debt, but you’ll still have to pay for the purchases made. As a rule of thumb, if you can’t pay it off by the end of the month, don’t buy it.

Not all credit cards offer grace periods. There is no law mandating grace periods on credit cards, but if one does offer a grace period — and most do — the Credit CARD Act of 2009 provides some rules.

“If your card has a grace period, you must be given at least 21 days to make your payment to avoid interest,” says Detweiler. “In addition, your due date must be the same date each month. Prior to the CARD Act, some issuers would change due dates, which would trip consumers up.”

Odds are your grace period is even longer than what’s legally required. A 2015 Consumer Financial Protection Bureau study found most issuers opt to extend grace periods to the full billing cycle, which is typically 25 days. However, don’t assume this applies to you. Always check your card’s terms and conditions for the length of your grace period.

Business credit cards fall outside of the CARD Act’s requirements. Still, many business credit card issuers choose to offer grace periods as a customer benefit.

Most grace periods are exclusive to new purchases on a card. Balances from charges such as cash advances and balance transfers are generally not covered and will start to accrue interest immediately.

If you find yourself in a position where you absolutely must take out a credit card cash advance, do your best to pay it off as soon as possible. Interest on cash advances, which almost always accrue at higher rates than regular purchases, will usually compile daily.

You can lose your grace period. “One of the biggest misunderstandings about grace periods is the fact that if you carry a balance — even just $1 — from one billing cycle to the next, you essentially lose the grace period,” says Detweiler. “All purchases will then incur interest immediately.”

There are exceptions to this rule. You can carry a balance interest free on credit cards that offer zero percent APRs on purchases or balance transfers as long as you are within the introductory period — generally 12 to 18 months — and make at least the minimum payment on time.

[Read: The Best Cash Back Credit Cards of 2018.]

The good news is even if you lose it, your grace period isn’t necessarily gone for good. Most issuers restore grace periods after cardholders pay their outstanding balance in full for two consecutive months.

You may be able to extend your grace period. Many credit card issuers allow you to change your card’s due date, effectively extending your grace period. Pushing your due date to later in the month can give you more time to hold your balance interest free. It can also help align your bill with your payday.

If you do move your due date, make sure you know when exactly when the change comes into effect. Otherwise, you risk missing your payment altogether.

How Much Money Can Your Grace Period Save You?

Let’s assume your credit card’s APR is 16.8 percent and you’re holding a balance of $1,000. If you make only a minimum payment of $25, then after six months you would have added $92 in interest to your balance. In other words, if you had paid off your balance within your grace period, you would’ve saved $92.

That doesn’t factor in opportunity cost, or the cost of not investing the money lost to interest. Had you invested that $92 into the S&P 500 — which has offered an average annualized return of 9.8 percent over the long term, according to CNBC — you would’ve netted an additional $9 on the year. That might not seem like a lot on its own, but over time, additional savings add up.

Best Ways to Stay Within Your Grace Period

Use autopay. Automating your payments is the easiest way to ensure that you pay your bill on time and fend off interest.

“You don’t want to have to remember to write a check and to send it in,” says Lowry. “You just automate it, and it will be set to pay on the exact date it’s due, meaning you’ll get your full grace period.”

[Read: The Best Low-Interest Credit Cards of 2018.]

Most issuers allow you to set autopay for the minimum payment, full balance or a custom amount. If the goal is to maintain your grace period, set autopay for your full monthly balance. Of course, make sure that the payment account has enough funds to cover the credit card balance. Otherwise, prepare to pay overdraft fees or face the penalties of a returned credit card payment.

Don’t spend beyond your means. One way to ensure you stay within your grace period is to not spend beyond what you can afford in a given month. Carrying a balance will generally result in a loss of your grace period, but if you keep your monthly balance within a range that you can pay off each statement period, you’ll maintain your grace period and avoid debt and interest. Paying your balance each month can help you avoid credit card debt.

What to Do if You Lose Your Grace Period

If you lose your grace period, the best recourse is to pay off your balance as soon as possible. Because most issuers restore your grace period after you pay off your balance in full for two consecutive months, a grace period lapse can be short-lived.

If you can’t pay off your balance in full, you may want to consider transferring your balance to a credit card with an introductory zero percent APR. You’ll need to find a card that allows balance transfers, and it’s even better to find one that doesn’t have a balance transfer fee. While transferring your balance won’t make it go away, it’ll at least give you some more time to pay it off interest free.

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How Your Grace Period Can Save You from Credit Card Debt originally appeared on usnews.com