Would you be interested in an interest-free loan every month? If you have a credit card, you may already be taking that interest-free loan — whether you realize it or not — thanks to the credit card grace period.
A credit card grace period is the period of time between the closing of the monthly billing cycle and the due date of that bill for that cycle. If you pay your monthly balance in full by the due date, you can avoid interest charges on all of the purchases made during that billing period. That amounts to an interest-free loan during the grace period up until the point at which you pay the bill.
Credit card issuers are not obligated to offer a grace period, but most do. Typically, the grace period is from 21 to 25 days, and may extend an extra day if the due date falls on a weekend. When a grace period is offered, the bill must be mailed or delivered at least 21 days before the due date.
Is 21 days not enough? You can effectively extend the grace period on major purchases by making those purchases immediately after the closing date for any month. This can provide around 50 days interest-free on those purchases, with the remaining 28 to 30 days in the billing cycle combined with the 21 or more days that you are given to pay the bill from that cycle.
The closing date may vary slightly, so if you plan to use this strategy, be very sure that the closing date has passed before making purchases. Do not assume that the month will close before your purchase is posted. Many cards will allow you to check your balance online; you can verify on the website that the closing date has passed by looking under the current month's purchases.
The closer you pay your bill to the due date, the longer your interest-free period extends – but you must be very careful to avoid missing the due date. If you do, not only do you accrue interest on the purchases and potential late fees, you may make it more difficult to reclaim future grace periods.
Interest accrues on all purchases from the date that you make the purchase, but when you use the grace period and pay off the balance in full, all interest is waived and the distinction is meaningless. When you carry a balance over to the next month, the grace period disappears and you pay interest on all purchases made during that billing cycle (not just the ones that you didn't pay off), accrued from the date of purchase.
Carrying a balance may also forfeit your grace period for the next month, meaning that it will take at least two months of full payments to wipe out a balance and restore the privilege. Even with a full payment of the balance in the next month, "trailing interest" can trip you up. Unless you have a mechanism to pay the bill immediately (such as online transfer from a bank account), so-called trailing interest can accrue during the few days that it takes your payment to arrive and be posted.
To verify that your card has a grace period and how that grace period works, check the terms and conditions of your credit card agreement. Look for language that outlines when and how interest will accrue, and how grace periods can be lost and regained. Also verify which transactions qualify for interest-free treatment, because cash advances, balance transfers, and other non-purchases may be treated differently.
Using your credit card to give yourself an interest-free loan is prudent for a number of reasons, but one of the best has nothing to do with the billing cycle. If you regularly qualify for the interest-free grace period, that means you are paying off your bill in full every month — and therefore you never charge more than you can pay off at the end of every month. Enjoy your monthly interest-free loan and give yourself a round of applause for sound fiscal habits.