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What Is an Interest-Free Grace Period on Your Credit Card?

Dec. 29, 2020
5 mins
A young woman types her credit card details into her laptop while sitting cross-legged on the couch

Your credit card doesn’t have to cost you a dime, unless you choose a card with an annual fee, of course. The point being, you can avoid interest charges if you pay your statement on time and in full—thanks to the grace period.

What is an interest-free grace period?

The grace period is a window of time given to you by your credit card provider to pay for your previous month’s purchases without the bank or financial institution charging you interest.

The grace period begins on the last day of your monthly billing cycle—generally when you receive your statement—and lasts for a minimum of 21 days. Your bill’s due date will be at the end of this period. If you pay your credit card bill in full during this time, you won’t incur interest charges on your purchases.

The grace period still applies to new purchases that appear on your current bill if you carry a balance month-over-month; however, you will continue to accrue interest on the outstanding amount from the previous billing cycle.

The lender will continue to charge interest until you pay your balance in full. The interest is essentially the cost of borrowing money.

How a grace period works:

Here is a simple scenario to demonstrate how a grace period works.

Jane buys a laptop using her credit card on March 11 and receives her statement on April 1. The 21-day interest-free grace period begins on the last day of her billing cycle, which is also the day Jane gets her credit card bill (April 1).

The grace period applies to all her purchases on the March statement, including the laptop. That means she has until April 21 to pay off her credit card balance and avoid interest charges.

Do all credit cards have a grace period?

People mistakenly refer to charge cards as credit cards. Although they are similar, there are a few significant differences. Charge cards have no pre-set spending limits, and the cardholder must pay the balance in full each month, unlike credit cards. So, there is no grace period.

Usually, a steep interest rate applies to balances not paid in full, which can be upwards of 30%. This rate is much higher than a standard credit card at around 19.99%.

Additionally, charge cards often have high annual fees and require cardholders to have excellent credit scores.

Is there a grace period for cash advances?

A grace period does not apply to cash-like transactions, including money withdrawn from an ATM, credit card cheques, or even lottery tickets.

The interest rate for cash advances is typically higher than purchases, and there is no grace period. The lender will charge interest starting when you use a cash advance until you repay the funds, and often there is an additional fee for using this service.

Generally, there are less expensive ways to borrow money, like a line of credit. However, financial products usually take time to apply for and set up before you can use them. So, if you find yourself needing a cash advance from your credit card, plan to pay off your balance as soon as you can because interest charges begin immediately.

What happens if you only pay the minimum payment?

If you do not pay your balance in full by the due date, which includes paying only the minimum payment, you must pay the lender interest. Interest applies to all the purchases and fees dating back to the transaction date—not the end of the grace period. You will owe interest on the balance until you pay the total amount you owe.

Although each lender will have a slightly different method, interest is calculated daily on the balance. That’s right. Your credit card expresses your interest as a yearly rate but calculates it daily and charges it monthly.

It may not always be possible to pay off your entire balance; however, you should try to do so as quickly as possible to avoid compounding interest charges.

What happens when you miss a payment on your credit card?

If you happen to miss a payment, you may face a series of consequences. To start, you will owe interest from the date of purchase on each transaction that appears in your statement. Your credit score may take a hit, and the lender may charge you a higher interest rate on your overdue payments.

Always make sure to pay at least the minimum payment on your credit card to avoid additional charges and penalties, even when you are disputing a transaction.

Many credit card companies allow users to set up automatic bill payments directly from their chequing account. Usually, this feature enables cardholders to pay either the minimum fee or full balance as soon as the statement is available.

Why is an interest-free grace period beneficial?

Cardholders can take advantage of the interest-free grace period to temporarily borrow money free of charge. However, cardholders need to pay their balance in full to avoid accruing interest and ensure they benefit from additional rewards.

While credit cards can be the most rewarding way to earn on your everyday purchases, the return on your spending (the number of rewards you earn) can be offset easily by mounting interest charges or penalties.

Always read the cardholder agreement that comes with your credit card. Your card’s terms and conditions should include the grace period, interest rates (plural), and any rewards or insurance coverage. Knowing these details can help you use your credit card to the fullest.

Hayley Osmond

Hayley Osmond is an editor and writer in the personal finance space, where she uses her eight years of media and marketing experience to bring content to life. She specializes in money products, including mortgages, home and auto insurance, and credit cards. Hayley holds a Broadcast Journalism diploma from Sheridan College and was awarded the Shaw Media Journalism and Media Award for graduating at the top of her class. Her work has appeared in Global News and diverse digital corporate training materials behind the scenes.

Hayley is passionate about making complex subjects, such as home buying and financial literacy, concise and intriguing. Her work has garnered media coverage from The Globe and Mail, blogTO, Yahoo! News, and CityNews 680 and has been syndicated across other publications.

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