The Confusing World Credit Card Grace Periods

No one will argue that credit card contracts are confusing. With fluctuating APRs, revolving credit lines, multiple methods of calculating finance charges, and legal language that looks like something out of a J.R.R Tolkien book it is no surprise very few consumers actually understand the agreement they are getting into.

But the fact is that despite the downside of arcane legal confusion, credit cards can make our lives easier, and in some cases they are an absolute necessity. What we as consumers need to do is to take the overwhelming information contained in the credit card application, as well as the Terms and Conditions (TOC) and break it down until we understand what we are signing. It will be the purpose of this blog to help explain credit card lingo in a way we can all understand, one thing at a time. Today we are going to talk about:

Credit Card Grace Periods

In general, a grace period referrers to the amount of time a buyer has to pay off a new purchase before finance charges are applied. This seems easy enough, but there are several methods of calculating grace periods, and sometimes it can be unclear which one your card might be using.

By way of example, let’s look at a particular TOC from Bank of America. Scroll down to “Grace Period for Purchases”. First off, we notice that it’s not just called a grace period, but a “Grace Period for Purchases”. This is important, because this tells us that their grace period only applies to purchases. Does it apply to cash advances or balance transfers? Probably not, so let’s look further. There is no mention of a grace period for any other type of transaction, so we can safely assume there isn’t. If we want to learn more about grace periods on alternative transactions, we will need to call the creditor. So let’s do that.

After a short time on hold, I was greeted and helped by a well informed account manager that cleared the issue up. For this particular card there are no grace periods for balance transfers from one credit card to another, nor is there a grace period for cash advances. What this comes out to is if you transfer any amount worth of debt from one low interest credit card to this card, or make a cash advance, interest is applied immediately. If you paid the balance transfer or cash advance off the next day, you will still owe a finance charge as per your individual APR. This is not uncommon, and with this particular Bank of America card, if you have good credit the interest is competitive. You will have an incredibly hard time finding a creditor that offers grace periods on anything other than new purchases.

If you notice the line next to the grace period reads that the grace period is, “At least 20 days from the statement Billing Date (provided you fully paid your New Balance from the previous statement by its Payment Due Date)”. This is important, and needs to be understood. Basically, if you made a new purchase during your previous billing cycle and didn’t pay off the balance in its entirety, you get no grace period on purchases the following billing cycle. So in simplest terms if you carry a balance don’t expect a grace period, unless you skip a month and make no purchases for two billing cycles, and still carry over the old balance. Sound weird? It is, so try not to carry a balance as it can confuse you and possible get you into trouble.

So far we have looked at specifics in order to get an understanding of the language and terms that we might be dealing with. In general there are three common types of grace periods which are:

• Full Grace Period
• Partial Grace Period
• No Grace Period

Full Grace Period

This type of grace period favors the consumer because it excludes new purchases. This means that you have the opportunity to pay off your balance before interest is applied to any new purchases during the current billing cycle. An example would be if you purchased a $600 chair on your credit card, then paid off your balance in full before the end of your billing cycle you would not be hit with finance charges. More information on this can be found in the article How Credit Card Companies Compute Interest Charges

Partial Grace Period

This is very similar to the full grace period, but it provisionally includes new purchases. The provision is if the card holder paid their balance in full the previous billing cycle, then interest will not be applied to new purchases till the end of the billing cycle. If a balance was carried over due too new purchases the previous billing cycle, interest rates are applied immediately and there is no grace period.

No Grace Period

This is the easiest grace period to understand. There is no grace period even if you didn’t carry a balance over from the previous billing cycle. Interest rates are applied to all transactions the moment they happen. This type of grace period is rare.