Most 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.