Grace periods give credit card holders a period of time, usually between 20 and 25 days, to repay any purchases made using the card the previous month.
By paying off the balance in full within the grace period, consumers can avoid being hit with costly finance charges.
But if you carry a balance each month, chances are you’re accruing interest on both the existing balance and any new purchases made, regardless of whether you pay off those new purchases within the grace period.
Though most credit cards come with a grace period, the terms on most cards won’t stop credit card issuers from charging interest on recent purchases immediately if you carry a balance.
If you read the fine print carefully, most of these grace periods apply to interest charges on new purchases assuming you don’t have an existing balance.
According to American Express, under typical grace periods, you begin accruing interest on new purchases immediately when you carry over a single penny from the previous month’s balance.
So even if you’re only carrying a previous balance of a penny, any new purchases made with the credit card will be subject to finance charges immediately, regardless of whether they are paid off in full by the standard due date.
This tricky rule can lead to some nasty surprises and an angry call to your credit card issuer if you’re not careful.
Take note that there are exceptions to this rule, with some credit card issuers offering a grace period that usually reads as “average daily balance excluding new purchases.”
In this case, you can carry a balance and make new purchases without accruing interest, though this type of “full grace period” is rather rare.
Also understand that some credit cards, a charge card for example, come with no grace period at all, so as a rule of thumb, it’s probably 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.
Otherwise, you should assume that you’re being charged interest on both the existing balance as well as new purchases.
Read more: Credit card grace periods.