What Is a Grace Period, and How Does It Work?

By Mary Hunt

March 17, 2021 5 min read

Dear Mary: Is there a law that says how long the grace period must be? (And if you don't mind, exactly what IS a grace period?) — Justin

Dear Justin: In the world of lending and borrowing, the "grace period" is the number of days between the time you make a credit card purchase and when you will begin to pay interest on that short-term loan.

Here's how it works:

When you pay your credit card balance in full during the "grace period," you don't have to pay any interest — the operative words here being "in full." That means you pay the entire balance owing every month. If you don't pay the entire balance and instead roll it over to the next month, you forfeit the grace period until your balance returns to $0.

If you do not pay that credit card account balance right down to $0 every month before the due date, you forfeit the grace period, and interest commences the minute you make a purchase with that card.

Your credit card's grace period affects the interest you pay but does not change the due date. You're still required to pay by the due date to avoid late payment penalties. Paying late also causes you to forfeit your grace period and triggers a late fee and possible damage to your credit score.

Credit card issuers are not required by law to grant a grace period in their terms and conditions, however, most do. Some card issuers give 30 days to pay without interest, but a grace period of 20 or 25 days is more common. Some have no grace period at all.

Dear Mary: The ad promised a great interest rate, but when I got approved for the credit card account, my rate was much higher. Did I get scammed? — Samantha

Dear Samantha: I don't know if I'd call it getting scammed, but you've definitely experienced the old bait and switch.

They drew you in with promises of a low interest rate (it was a tease) and got you to apply, and when they decided you didn't qualify for the better deal, they made the switch.

These days, only an excellent credit score — generally above 740 — will get those advertised rates. If you have a lower score, your application will be rejected or you'll be offered a card with a higher interest rate. It's in the fine print.

Dear Mary: Are credit card companies allowed to send you to collection, even though you've been making monthly payments, just not meeting the payment required? — Ben

Dear Ben: They sure can. If you do not abide by the terms and conditions of your contract with the company, you are in default.

While a credit card company is required by law to accept any amount of money at any time and apply it to the customer's account, if the amount received by the due date is less than required by the terms of the agreement, they'll slap you with a late fee. And if that late fee pushes your outstanding balance over the credit limit, they'll slap on an over-limit fee, too.

If the account remains in default, they can and probably will send it to collection.

Here's something else to consider: As long as you are in default, they will continue to report you to the credit bureaus as late. Continual "past-due" entries will wreak havoc on your credit score.

Assuming you're asking this for yourself and your account has gone to collection — and even though you didn't ask my advice, here it is — call the issuer directly right now. Find out the status of your account and how you can bring it current to get it out of collection. If it's possible, you're going to need to come up with enough money to do that. It might mean selling assets, working extra hours or even getting a side job for nights and weekends. As rough as that might be for a season, it will be worth the effort. Good luck!

Mary invites you to visit her at EverydayCheapskate.com, where this column is archived complete with links and resources for all recommended products and services. Mary invites questions and comments at https://www.everydaycheapskate.com/contact/, "Ask Mary." Tips can be submitted at tips.everydaycheapskate.com/. This column will answer questions of general interest, but letters cannot be answered individually. Mary Hunt is the founder of EverydayCheapskate.com, a frugal living blog, and the author of the book "Debt-Proof Living."

Photo credit: StockSnap at Pixabay

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