Credit Card Grace Period – How They Really Work

grace period terms and conditionsMost people are familiar with grace periods on credit cards, but unfortunately most people are unaware of the sneaky trick I’m about to tell you about.

What is a credit card grace period?
It is a window of time you have where you will not accrue interest charges, if you pay them off in full. This grace period starts when your billing cycle closes. It ends when the payment is due for that billing cycle.

What’s the shortest a grace period can be?
A new law went into effect in February 2010 (from the Credit CARD Act of 2009). It requires cardholders to be given a “a reasonable amount of time” for making payments. How long is reasonable? The law states a minimum of 21 days must be given for credit card grace periods, which starts when the billing statement is issued.

Before this grace period new law went into effect, some sketchy banks would start charging interest as soon as a purchase was made. Fortunately, those days are behind us!

How do grace periods work? Not how you would think…
Most people seem to assume that even if they don’t pay their balance off in full, interest will not start accruing until after the grace period… unfortunately that’s not how it works!

You see, if the full amount isn’t paid off before the grace period ends, then you will be charged interest going back all the way to when the purchases were made.

Here’s an example:

  • You purchase a $1,100 TV on October 22nd
  • Billing cycle closes on Nov 15th and the due date is Dec 7th. You pay $100 on Dec 3th.
  • On Dec 10th (3 days after the due date) you pay off the remaining $1,000.

A month later your next statement comes… surprise!  Instead of being charged for 3 days of interest on the $1,000 like you thought you would, you have been charged interest for 47 days on the $1,000 (going back to the date of purchase).

But that’s not all… you have also been charged interest on the $100 that you paid before the due date! Interest charges for 43 days, going from the date of purchase until the date of payment (Dec 5th) have been charged to your account.

…and here we thought you were just going to be charged for 3 days of interest on the $1,000!

How do they get away with this?
Unfortunately, credit card companies don’t seem to do a good job explaining exactly how a grace period works. Basically, your interest starts accruing the moment you make a purchase… the only way that interest is waived is if you pay off 100% of the charges in full by the due date. If not, you will be slammed with interest going back to the date of purchase, as explained in the above example.

Sure, the credit card grace period definition is buried in the fine print, but they use so much legal mumbo jumbo to explain it, most lawyers can’t even understand! So it comes as no surprise to me that many people are completely unaware of this.

Do cash advances/convenience checks work the same way?
Those are even worse. There is no grace period on credit card cash advances/convenience checks. They start accruing interest from the day you begin using them and you will be charged that interest even if you pay off your credit card statement in full.

You are going to encounter these drawbacks with even the best credit cards. The way to avoid these sneaky tricks is to pay your balances in full each and every month, plus you should avoid those cash advances altogether.

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US Bank has an even sneakier punch. If you use their balance transfer offers which offer 0% interest for a long time (in my case for over a year) and then use your card AT ALL, they get rid of your grace period. For example, if you transfer $2000, say, and then spend $4000, making your total bill $6000, you would think that paying off your $4000 purchases immediately (plus a little more) would put you back to 0% interest on the remaining $2000 that you had transfered. But it doesn’t. Having a balance transfer on your card reassigns new purchases to a catagory that allows interest to accrue immediately on whatever the *average* daily balance is. So you pay the fee for the transfer (4%) and you pay off the total for the new purchases and you- who knew?!- also pay interest. It begs the question of if you’re charged interest during the grace period on purchases and on cash advances that individually have 0% interest, can that be legal? Didn’t the 2009 act get rid of this kind of scam?

That is not all! Citibank credit card has another sneaky punch on our face. They now eliminate two periods of grace period forcing you to pay interest on all purchases for two additional months. So you make one partial payment and they screw you for three months of interests. This is penalty for paying on time!

I pay my one & only credit card off each month in full by the due date for over 10 years. But I apparently lost a statement with balance due of $1782, forgot all about it & didn’t realize what had happened until the following statement came with $4084 addt’l purchases I’d made. Total interest billed with that latter month’s statement came to $66.67. Guessing it is this high because I’m being charged ~$26.62 on the 1782, and also interest on each purchase made since that earlier billing cycle closed. I promptly paid the 1782 plus the 4084, and got charged interest again, the following month — but they’ve agreed to waive that 2nd interest charge.

So is the $66.67 correct, approx? It feels like usury to me.

Thanks for your feedback in advance,

Karen Freeman