Pay no Interest When you Understand the Grace Period

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Among credit card industry insiders, those who pay interest every month are known as "revolvers," while those who never pay interest are referred to as "deadbeats." This is actually the one occasion where you want to be known as a deadbeat, because it means that you are not perpetually spending your hard earned money on credit card interest charges.

Becoming a Deadbeat Takes Grace

The key to avoiding interest charges is understanding how your credit card's grace period works. The "grace period" refers to the time between the statement closing date and the statement's due date. During this time, cardholders are offered the opportunity to avoid all interest charges by paying their statement balance in full.

The way the credit card issuers think of it, cardholders are always accruing interest on all of their purchases. However, the interest charges are waived if the cardholder pays his or her entire statement balance in full during the grace period. For example, imagine a cardholder has a statement period that lasts from June 1st to June 30th. On midnight of the 30th, the statement period is considered closed. Within a day or two, the statement is printed and mailed, or made available online. The cardholder then has until the statement's due date to make a payment.

If the payment is less than the entire statement balance, the cardholder is charged interest based on his or her average daily balance going back to June 1st. Those interest charges will appear on the next statement balance issued on July 30th, and will include daily interest charges for all of June and up to July 30th, the end of the next 30 day statement period.

On the other hand, if the cardholder chooses to pay the entire statement balance before the due date, then all interest charges are waived for the charges made in June, and the charges made in July are still eligible to be waived if they are eventually paid in full before the due date on the July statement.

How Cardholders Look at the Grace Period

From the perspective of the cardholder, the grace period can be a pretty strange concept. Imagine that our hypothetical cardholder incurred $2,000 of charges in the June statement period, and another $2,000 in July. But instead of paying the entire June statement balance of $2,000, the cardholder was only able to pay $1,900 before the due date of July 25th. It is only a difference of $100, so how bad could that be?

This cardholder has forfeited the grace period, even though 95% of the statement balance was paid before the due date. The cardholder is now responsible for the average daily balance of all $2,000 of charges from June 1st to June 30th, as well the additional $2,000 charged in July.

Sure, that balance will drop from $4,000 to $2,100 when the $1,900 payment is credited to the account, but the July statement will still show a balance of at least $2,100 plus substantial interest charges. The amount of the interest charged depends on the card's interest rate, as well as when during the statement cycle the purchases occurred, but it is entirely possible that the cardholder could see interest charges approaching or exceeding $100, the difference between payment in full and carrying a balance. So to the cardholder, missing out on the grace period can feel like paying 100% interest over a month, or a 1,200% annual percentage rate (APR)!

Grace periodClick to expand

The Good News About the Grace Period

Although cardholders can feel oppressed by the perception of sky-high interest rates being applied when they fall just short of making payment in full before their statement due date, having access to a credit card's grace period can be a beautiful thing. Those who consistently pay their entire statement balance in full and on-time effectively receives an interest free loan from their card issuer. This explains why industry insiders refer to those cardholders as "deadbeats."

Each month, these cardholders may continue to charge all of their purchases, large and small to their credit cards. At the end of the month, they receive their statement and meticulously ensure that their entire balance is paid off before the due date, so that no interest charges ever appear on their future statements. At any given time, these cardholders may have thousands of dollars of outstanding balances from previous purchases, but they never pay a penny in interest. Furthermore, they can earn valuable rewards in the form of points, miles, and cash back at no cost to themselves, other than any applicable annual fees.

Managing Your Grace Period

Now that you understand how a grace period works, there are a few tricks that you can use to manage your card's grace period to your advantage.

1. Know your statement closing date. While a card's payment due date is prominently displayed on each statement, the statement closing date is usually absent.? Nevertheless, this information is often available online, and can always be learned by contacting the card issuer's customer service. If your goal is to pay off your entire statement balance each month to avoid interest, it will always be better to make a purchase just after the closing date instead of just before. This gives cardholders an additional 30 days in which to make their payments.

2. If you lose your grace period, quickly get it back. As you can see, failing to make a payment in the full amount of your statement balance will cause you to retroactively lose your grace period, but you can immediately restore it. As soon as you realize that you have lost your grace period, make a payment that covers your entire current outstanding balance. This won't affect the interest accrued on past charges, but will make future charges eligible for the grace period. Nevertheless, cardholders may even be successful in requesting that their card issuer waives an occasional interest charge, especially if it was due to a one-time mistake or some circumstance outside of their control.

3. Keep a grace period on at least some cards. Since each card has its own grace period, it is possible for cardholders to save money on interest by making payments in full on some cards, even if they must carry a balance on others. For example, a business traveler might use one card for expenses that are reimbursed by his or her client or company. By dedicating those reimbursement checks to paying each statement balance in full, the traveler utilizes the grace period to avoid interest on those expenses, even while possibly carrying a balance on other cards.

4. Try Chase Blueprint. Certain cards issued by Chase have access to their unique Blueprint program that allows cardholders to pay off some charges in full while carrying a balance on others. Blueprint also contains powerful budgeting and goal setting tools. There is no charge to use Blueprint, which is available on all of their Slate, Freedom, Sapphire, and Ink cards.

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