What is a grace period

Sometimes, your late payment isn’t really late. And sometimes it’s possible to use credit cards without paying a dime in interest. Both of these bits of financial savvy have their roots in the grace period. Let’s explore what a grace period is and how it could help you manage your finances and save money.  

Grace Period Defined

A grace period is a window of time when you can make a payment without a negative consequence, such as interest charges, late fees, or other penalties. 

Grace periods are common for a variety of payments. These include credit card payments, mortgage and other loan payments, and utility payments.

How Does a Payment Grace Period Work?

Now and then, there’s bound to be a delay between when a payment first comes due and when you can make that payment. A payment grace period acknowledges this by giving you time to make the payment without considering it late.

This can work in a couple of different ways:

• If you’re sent a bill for payment, you owe the money. But the payment deadline is typically a specific date in the future, or something like “30 days after billing date.” You’re in the grace period.

• On a loan, the grace period is a number of days after the payment deadline when you can still make a payment that’s not considered late. For example, payments may be due on the last day of each month, with the grace period extending until the 15th of the following month. Not all loans have a grace period.

Check out your billing statements or loan agreements carefully so you know exactly when the grace period ends. That way, you can make sure the money is available by then.

Once you know your grace periods, you can use them to plan ahead and make the payments within those times.

If you don’t pay within the payment grace period, you might be hit with late fees and extra interest charges. Your late payments might also be reported to the credit bureaus, which can hurt your credit score. If you’re late often, the service provider could even cancel your account. 

Why Is the Grace Period Important?

The grace period gives you extra time to make a payment without additional cost. This is important because paying by the end of the grace period means you could avoid:

• Extra interest charges

• Penalty interest rate (a higher interest rate that applies to your entire balance)

• Late fees

• Credit score damage when late payments are reported to credit bureaus

Grace periods give you time to pay. Being aware of them can give you flexibility to avoid extra charges.

Types of Grace Periods

Here’s how grace periods work for some different types of payments:

Credit card grace periods: How long are they?

The law requires credit card issuers to give you a grace period of at least 21 days after the end of your billing cycle before the payment is due. Some grace periods are longer. 

You can find out your credit card grace period two ways. First, it should be in the credit card agreement you originally signed when you opened the account. Understandably, you might not have a copy handy. That’s okay. The other way to find out your grace period is to look at your monthly statements. Each one will tell you what day your billing cycle ended, and what day your payment is due. Those two dates should be at least 21 days apart.

How a credit card grace period could save you money

On most credit cards, if you fully pay off your purchases by the payment due date, you won’t pay any interest on those purchases. The interest-free grace period is effectively the entire time between the day you made the purchase and your payment due date.

The interest-free grace period applies to purchases. It typically doesn’t apply to cash advances, balance transfers, or other transactions. 

Also, if you don’t clear your entire balance, you could lose the grace period for the following month. For some cards, you’ll need to maintain a zero balance for two months or longer before you can get your interest-free grace period back.

Loans and other grace periods

Loans don’t pause interest during the grace period. But you might have extra time beyond the due date when you can pay without getting hit by a late fee or other consequences.

Mortgages

For mortgages, the grace period is often around 15 days. So, for example, if your regular payments are due on the last day of each month, you would have until the 15th of the following month to make your payments. 

The grace period for loans is specified in the loan agreement. You can make note of this, and plan your payments accordingly. The grace period could come in handy if, say, you’re paid every other Friday and your next payday happens to be on the 5th.

Student loans

Student loans have a grace period that gives you time after you leave school before payments are due. For most federal student loans, this grace period is 6 months. The grace period could begin when you graduate, leave school for any reason, or scale back your coursework to less than half-time.

Rent and bills

Rents aren’t loans, but could offer a grace period. The grace period should be specified in the rental agreement, and it’s often around three to five days after the due date.

Grace periods for other bills, such as utilities or your cell phone, vary. You can review the agreement you signed, or contact the provider to ask. Each monthly billing statement should list the date by which payment must be received. 

Tips for using the grace periods to your advantage

Here are some ways you can make sure you use your grace periods successfully. 

• Time larger purchases at the beginning of your statement billing cycle. That gives you the maximum amount of time to pay it off before the interest-free grace period ends.

• Pay off your credit card balance every month by the due date. That way, you won’t risk losing your interest-free grace period. If you can’t pay off your balance, focus on reducing it until you can.

• Before you finish school, make a clear plan for how you’ll find a job before your grace period ends and your loan payments start. 

• Plan your cash flow to make sure money is available when you need to make your payments. Use automatic payments carefully unless you know you’ll have money in your account by the due date and won’t have to use your payment grace period.

Steps for mastering your own grace periods

Now that you understand how grace periods work, it’s time to find out exactly what yours are:

• Get in the habit of checking the grace period in any new credit or service agreement you sign. For the accounts you already have, look at a monthly statement or check with the provider.

• Make a detailed list of all your regular bills for reference. Include the amounts you expect them to be, what their due date cycle is, and the length of the grace period.

• Don’t cut your timing too close by waiting until the last day of the grace period. Leave yourself a little room for unexpected events.

Think of grace periods as an opportunity. They give you a little extra wiggle room. You can use that opportunity to your advantage.