Credit card grace period: Use it to pay no interest

There’s no need to scramble for a 0 percent APR financing offer with a new credit card issuer. In fact, with most credit cards, your grace period can help you finance large purchases and reap rewards while using a free, one-to-two-month loan simply by paying your statement balance in full each month.

Grace periods allow credit card power users to rack up card rewards and benefits for free. You can also forfeit your cards’ grace period by accident — either by paying your bill late or by intermittently carrying a balance.

Here’s what you need to know about credit card grace periods and how to use them to your advantage.

What is a grace period?

A credit card grace period is a length of time during which you can charge purchases to your card and wait to pay for them without being charged interest. The period stretches from the end of the billing period until your next payment due date and must last at least 21 days, as mandated by the CARD Act of 2009.

You can find out how long your card’s grace period is — and whether your card even offers one — by looking at the Schumer Box in your card’s terms and conditions. Underneath the APR disclosures, there will typically be a line that spells out how you can avoid paying interest.

If you don’t see a line stating how you can avoid getting charged interest, that’s a red flag. It could mean your credit card doesn’t offer a grace period. In that case, your purchases will begin accumulating interest on day one of each transaction, even if you pay off your balance in full by the due date

Be sure to read the terms carefully. For some cards, you may find that only select cardholders are given a grace period. Also keep in mind that only new purchases get a grace period. Cash advances and balance transfers start accumulating interest as soon as they hit your account.

How does a card’s grace period work?

During your credit card’s billing cycle, any purchases you make will be recorded on your credit card transaction history and added to your monthly statement balance.

If you’ve been paying off your statement balances in full each month, however, your card issuer won’t charge you interest for any new purchases you make during the window of time that the grace period is still active.

So, for example, if you start a billing cycle with a $0 balance, you can buy an $800 couch and let that charge sit without paying for it until the payment for that cycle is due. Say your billing cycle lasts 31 days and your grace period is 21 days, you have 52 days until you must pay your issuer for the couch.

The catch: Grace periods are only guaranteed to last if you continue paying your monthly balances in full. If you only pay part of a balance one month (for example, you only pay the minimum amount due), your lender may cancel your grace period and any new purchases you make after that will start to accrue interest immediately.

Once you’ve lost your credit card grace period, you may need to wait for a few cycles before it starts up again. Check with your card issuer for more details.

How to make the most of your grace period

You can use your card’s grace period to your advantage to help briefly finance new purchases. It’s like asking someone for a loan and promising to pay them back in a couple of weeks. If you meet your promised deadline, you’ll only have to repay what you borrowed.

So, if you have a planned expense coming up, such as plane tickets or a new appliance, you can strategically wait to make that purchase until after your billing cycle closes. That will give you as much time as possible — between the beginning of your next billing cycle to the end of your grace period — to put off paying for your purchase without incurring any interest.

But remember: You’ll only get that perk if you continue paying off your balances in full. If you can’t make the payment by the end of the billing cycle, then paying cash for big expenses would probably help your finances better.

Consider taking these additional steps to utilize the grace period to your advantage:

• Stay on budget. You should always have an idea of how much you usually spend each month and if this month’s expenses line up with your habits. If not, try to eliminate any discretionary spending so that you can always pay off your full statement balance.
• Avoid cash advances and balance transfers. The grace period doesn’t apply to these kinds of transactions and will accrue interest immediately. Plus, the interest rate charged on these, especially without a 0 percent intro APR offer, are usually high and will quickly eat into your funds.
• Set up autopay. To be sure your bill is always paid on time, ask your issuer to automatically transfer money from your bank account to pay off your credit card bill. You can set it to autopay the minimum, the entire balance or a fixed amount.

How your billing cycle works

It’s common to refer to a billing period as a one-month cycle. But with credit cards, the reality is a bit more complicated.

When you open your account with a credit card company, any purchases you make in that first billing period will be added to your statement balance and included in your bill. But once that billing cycle closes (meaning the bill has been added up and is in the mail), any purchases you make after that will get added to the next month’s balance statement.

So, for example, if your credit card billing period ends on the 23rd of each month, any purchases you make on the 24th or 25th will get billed the next month. And thanks to your card’s grace period, you won’t have to pay a finance charge for those purchases until three weeks later, when your bill is due.

Can you extend your credit card grace period?

Unfortunately, no. But you could buy yourself some extra time by requesting a different billing cycle date.

For example, if your current credit card bill closes on the 23rd of each month, and you usually get paid on the 25th, you could ask your credit card company to delay the closing date until the 28th. That would give yourself an extra five days of interest-free purchases each month.

And of course, as previously discussed, you could make your purchases immediately after the closing date and at the beginning of the next billing cycle, so you’ll have the entirety of the billing cycle and the grace period to pay it all off.

What happens if you carry a balance after your grace period?

If you continue to carry a balance after your grace period ends, the issuer will apply the regular purchase APR to that entire balance.

If you’re planning to make a large purchase and know you can’t pay it off in a month, consider applying for a card with an intro 0 percent APR period. You’ll need a good-to-excellent credit score to snag one, but if you can, you’ll get anywhere from six to 21 months to pay off your balance interest-free. The longer the intro offer you get, the better: You’ll have more time to make interest-free payments.

Bottom line

Credit card grace periods can work in your favor, as long as you pay off the statement balance. If you don’t, you’ll get charged the going APR on your balance. Whether or not your credit card offers a grace period, it’s always a good idea to pay off your balance in full each month — it can help you maintain savvy financial habits, keep your credit utilization ratio low and enable you to avoid racking up those expensive interest charges.