A credit card grace period gives you a chance to pay your credit card bill before interest and fees kick in. There’s always a little time between when your billing cycle ends and when your payment is due to the credit card company. That’s the credit card grace period. If you miss that grace period, interest will accrue on the unpaid balance.
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How the Credit Card Grace Period Works
Credit cards work in cycles. Once a month, your credit card billing cycle ends. But it would be pretty unreasonable for your bank to start charging you interest right away, without giving you a chance to pay off what you charged. So the credit card company provides a grace period.
Say your card goes to cycle on the 15th of the month. Your payment isn’t due on the 15th, or even the 16th. The earliest it could be due would be three weeks later, since federal law requires a grace period of at least 21 days. The time between the statement closing date and the payment due date is the grace period.
Of course, you can always pay your credit card early, before it goes to statement. This can be a useful technique if you’re trying to keep your credit utilization ratio low. Your credit utilization ratio is the ratio of the credit you’re using to the credit you have. The ratio contributes to your credit score, and it’s best to keep the ratio below 30% for the best score. So if your credit limit on your card is $3,000 and you charge $2,800 your credit will suffer, even if you pay it off in full before your grace period ends.
The balance you have at the time of your statement closing date is what gets sent to the credit bureaus, who then calculate your score based on your utilization ratio and other factors. So if you need to charge an amount close to your limit because you want the points or cash back or you have a big purchase to make, you can always make payments earlier in the cycle so that the balance that goes to statement (and to the bureaus) is lower.
Or if you have a big purchase to make, you can make it the day after your card’s closing statement date. Then, you make the previous month’s payment in full before the grace period ends, but you’ll still have a full cycle plus another grace period to pay off the big purchase you made. That will give you more time to put together the money to pay it off in full.
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There’s No Grace Period on Old Debt
If you carry credit card debt from one month to the next, there’s no grace period on that debt. Say you charge a single thousand-dollar purchase in April and you can’t pay that bill in full by the payment due date in May. You only pay $500 of that debt off in May. The amount you’ll owe by your June payment due date will include interest and fees on the unpaid $1,000 you carried from April to May, and on the $500 balance you carried between May and June. In other words, if you miss your grace period, interest accrues retroactively, starting from the date of the purchase(s) you put on the card. That makes your credit card debt grow more quickly and makes it harder to pay down.
That’s why it’s important to know when your statement closing date is and how long your grace period lasts so you can do your best not to miss out on a grace period. Miss a grace period once and your credit card company will revoke your grace period privileges, at least temporarily. If you continue to make purchases after missing a grace period, interest will accrue on those purchases immediately, with no grace period before your payment due date. If you pay the balance off in full, your credit card company will reinstate your grace period privileges, but some companies require more than one month of on-time payment before restoring a customer’s grace period.
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It’s a good idea to be familiar with the important dates on your credit card statement so you never miss a grace period and carry a balance to the following month. If you can afford to pay what you owe in full and on time every month, it’s in your interest to do so. Miss a payment and your credit score will dip, you’ll trigger late payment fees, you’ll accrue interest and you’ll forfeit at least one grace period.
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