#WhatTheFinance: Is a Grace Period?

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When it comes to credit cards, there’s so much vocabulary that makes it seem intimidating: billing cycle, statement closing date, annual percentage rate, grace period… UGH!

The grace period is pretty sweet for you as a borrower, so it’s definitely one term you’ll want to be very familiar with. Let’s break it down:

Each month you swipe your credit card to make purchases and they fall within a certain billing cycle. Let’s use an example of August 1st to September 1st. Any purchases made during that window of time will be due on the next bill which will probably have a due date of September 27th. Notice that the payments for what you borrowed aren’t due right away on September 2nd. Nope! That’s because the grace period is a gap of time between your last day in the billing cycle and the due date on your bill. 

In this example above the grace period starts on September 2nd and ends on September 26th. You can use the grace period however you want! For example, you could ignore it completely and wait for the due date to make your full payment since the grace period is a duration of about 25 days when you don’t have any responsibility to make a payment unless you want to. But, if you prefer to make payments little by little towards your balance, then you can pay a small amount every few days during the grace period and by the time the due date comes around, your balance will be paid in full. But, if you’re the type who’d rather make one lump sum payment and get this all over with, then you could set up a full payment any day in the grace period or on the due date – totally up to you!

Two key things to note here are:

  1. The grace period is designed to give you time to come up with the money you borrowed. Just like the grace period of “6 months after graduation” before you are required to make any payments towards your student loans. But the key difference (and the reason why credit card grace periods are so awesome) is that NO INTEREST will be charged on your credit card balance during the grace period. With student loans and other types of loans too – that is rarely the case. Interest usually starts accruing right away.
  2. Do not let the due date pass you by without making a payment, because this will negatively affect your credit score. Late payments hurt up to 35% of your credit score, so don’t miss your due dates like… ever!

The last thing you need to consider when deciding if and how you want to take advantage of your credit card grace period is your credit score right now and what you want or need it to be. Back when I was in college, I was pretty broke and I didn’t have much of a choice but to pay my credit card balance down little by little. What I notice as I think back to that time is that my credit score was always in the low 600’s because even though my payment history was solid (I always paid the minimum payment on time every month), I carried a pretty high balance every month. This affected my debt to credit ratio which is a big chunk of your credit score called credit utilization

The more you owe, the worse your credit utilization will be. If your credit card has $1,000 available to use and you spend $500 this month, then that credit card is halfway used up. That’s a 50% utilization score and it’s pretty close to maxing out the credit card, which is really bad! The best thing you can do is keep your utilization under 10% if anything. So in this example, it would mean when the grace period comes, paying down the balance and leaving only $100 instead of $500. This boosts your credit utilization and will probably help increase your credit score a lot! Just remember, you’ll still be paying interest on that $100, so best case scenario is always to pay it all off. 

The utilization score usually gets reported to the credit bureaus by your credit card company right before the grace period starts. So if your balances are high and you need a good credit score for some reason – like if you’re shopping for a mortgage or auto loan at the moment or soon, then you can’t take full advantage of the grace period. You can’t leave your balance to just sit and collect zero interest. I know that annoyed me back in college, but the reality is that back then my credit score didn’t matter to me as much as it does now. I wasn’t applying for credit too often and frankly, a difference of 70-100 points didn’t make a big difference to me back then. 

Today, however, I use my grace period very differently from how I used in back in my broke college days. While I know the grace period is the time when I’m not required to make any payments at all, I’d rather pay my balance in full before the grace period even starts so that my credit utilization is as high as it can be. That’s how I make sure I get the most points in the credit utilization part of my credit score.

So you’ve got to ask yourself: “Do I need a high credit score for an application for credit coming up in my life or not?” If so, pay down your balances before the grace period hits. If not, (lucky you) then you can use that grace period to your full advantage like I did in college and take your sweet time sending your payment in. Just make sure the credit card company gets that payment on or before the due date!