A “credit card grace period” is the time between the end of your billing cycle and your payment due date, although it’s a bit more complicated than that.
Essentially, this window, usually around 25 days, allows you to make a payment for the prior month’s purchases without accruing any interest on those items.
So your due date, as noted on your statement, is the day when the grace period ends, and after that, you’ll begin accruing interest on any unpaid portion of your balance if your credit card APR is greater than 0%.
Let’s take a look at different types of credit card grace periods to illustrate that point:
Full Credit Card Grace Period
This type of grace period allows you to carry a balance from prior months and still avoid interest on purchases made during your most recent billing cycle, assuming you pay them off entirely within the 25-day window. You’ll still be charged interest on the portion that you carry over, but new purchases paid for within the grace period that correspond to the latest billing cycle will be interest-free.
In credit card issuer speak, a full grace period will be listed as “average daily balance excluding new purchases,” meaning any balance carried over from previous billing cycles accrues interest by way of average daily balance, with new purchases excluded from this computation. *New purchases are those which are a part of the most recent billing cycle.
Standard Credit Card Grace Period
Unfortunately, the above formula is pretty rare, as most credit card issuers charge interest on all new purchases immediately if you’ve got a previous outstanding balance. But if you pay your credit card in full every month, this will still work like a full grace period. You won’t pay any interest as long as you make the full statement balance payment within the allotted time designated by the grace period each month.
In credit issuer speak, a standard grace period is listed as “average daily balance including new purchases,” meaning balances carried over from previous months as well as new purchases accrue interest based on the average daily balance computing model. So in this case, any outstanding balance from a prior billing cycle will essentially eliminate your grace period because any new charges accrue interest immediately.
In other words, don’t carry over a small amount from a prior billing cycle if you can pay it off in full. Otherwise you’ll get hit with interest for all your purchases made in the following statement period, which is a huge waste of money.
No Credit Card Grace Period
There are also situations where there is no grace period whatsoever. Typically, credit card cash advances and convenience checks have no grace period, and as a result, interest begins to accrue the minute you withdraw the funds! That can get expensive in a hurry. This assumes the APR is above 0%.
As a rule of thumb, it’s best to pay off your credit card in full each month or transfer the balance to a 0% APR credit card if you’re unable to do so.
And never assume you have a grace period that covers all of your purchases. You could be unpleasantly surprised with hefty finance charges. If you’re unsure about what type of grace period applies to your credit card, contact customer service and have them explain it to you very clearly.