By manybanking.com Staff
The time between when a purchase is made and it starts to accrue interest is known as the grace period. During the grace period, a credit card serves as a no-interest loan, but once the grace period expires, the normal method of calculating interest resumes.
Credit card companies have grace periods primarily for marketing purposes. This no-interest window allows those who pay off their balances each month the convenience of using a credit card without having to pay for the privilege with interest. However, the cardholder may still be subject to other fees, such as an annual fee, which allows the credit card issuer to still make money. In addition, the issuer can make money if and when the cardholder fails to pay off the balance within the grace period.
In the past, typical credit card grace periods were 30 days. This allowed those who made a regular payment at the end of a month to enjoy no-interest on purchases. In recent years, however, grace periods shrank down to 25 days. The shortened grace period made it harder for consumers to prevent finance charges from accruing. The recent credit crisis has caused typical grace periods to shorten to 20 days.
What many consumers don’t realize is that grace periods do not always apply to all new purchases. This window is usually only open when a card carries no balance. With a typical grace period, interest starts accruing immediately on new purchases if there is an existing balance on the account. Even if that existing balance is less than $1, the grace period is disregarded for that pay period. Some credit cards have no grace period at all regardless of the balance on the account. With these cards, the interest begins to accrue as soon as the transaction is completed.
When shopping for a new credit card, it is wise to examine the card’s grace period policy in the Terms & Conditions. A variety of credit card offers are available at manybanking.com. It’s also a good idea to examine the disclosures of your current credit cards to determine what types of grace periods they have, if any. The longer the grace period, the better off the consumer is. If you pay off your balance each month, make sure you do so within the grace period to prevent unnecessary interest payments,
It is important to note that grace periods can change. If an account defaults, for example, a 20-day grace period may be reduced or eliminated as a penalty. The grace period can also be modified at the credit companies discretion.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.