Written by: Zina Kumok
Edited by: Austin Lang
Reviewed by: Jon McDonald
You’ve heard the phrase “timing is everything,” and that is especially true with your finances. Just ask those who locked in 2.65% mortgage interest rates in 2021. But many credit cardholders have a golden opportunity to save money on interest every month by timing their payments right — it’s called a grace period.
When you have a credit card, there’s a gap between the time the bill comes in the mail (or to your inbox) and the due date. That gap is known as the grace period, and most credit cards have one. During that time, you can pay the entire balance without being charged interest on your purchases.
Best of all, you’ll get to keep your grace period for the next cycle!
For loans, the grace period works a little differently. It is the length of time you have after the payment is due and before any late fees are charged. That gap may be relatively short, but it can provide borrowers with a little wiggle room.
Understanding how grace periods work on loans and credit cards can help you avoid late fees and save money. So let’s take a look at the important differences between the types of grace periods so you can maximize yours.
Grace Periods on Credit Cards
A grace period on a credit card gives cardholders time to pay off their balance without accruing interest. But you need to know when they begin, when they end, and whether your card has one.
Check your credit card agreement to make sure, and if you have one, I’ll walk you through how it works.
When Grace Periods Begin
When you use a credit card, you aren’t required to make a payment until your due date. Once the statement is issued, you have a limited period of time before the payment is due. During this time, no interest accrues. This is your credit card’s grace period.
If you pay off your entire balance during your credit card’s designated grace period, you won’t pay any interest.
For example, let’s say that the statement was issued on September 3 with a due date of September 24. The time between September 3 and September 24 is the grace period.
This gives you time to pay off the entire balance without accruing interest charges. But once the due date hits, if you have a balance, interest starts accruing — unless you have a special APR promotion.
Typical Length
The typical length for a grace period is between 21 and 25 days, depending on the card issuer. The law requires issuers to give cardholders at least 21 days between the billing date and the statement due date. If you want to find out your card’s exact grace period, you can read the cardmember agreement you received when you initially signed up.
If you just opened a credit card, you may qualify for a longer grace period as part of a special promotion. These can last as long as 55 days. Again, never assume you know what the grace period is — it’s always better to verify than to accidentally miss a payment.
Sometimes credit cards have promotional periods that last far beyond the grace period. For example, many cards offer 0% APR for a long period of time, usually between six and 21 months.
As long as you make the minimum payment on time, you won’t accrue more interest during that time period. Many people use these special promotional periods to either pay down a large purchase, like an appliance, or pay down existing credit card balances through balance transfers.
What Happens When You Miss the Grace Period
On a credit card, the grace period reflects the time between when your billing cycle ends and your payment is due. If you only make the minimum payment by your due date, you will lose your grace period. That means you’ll be charged interest on your balance.
If you pay off the entire balance, you keep your grace period until the next month. You only lose it if you don’t pay your balance in full.
Now, if you don’t make at least the minimum payment by or on the due date, you’ll be late. At that point, not only may your grace period be rescinded, but some worse consequences potentially come into play.
First, you will likely pay a late fee and interest will be charged to your balance. The average credit card late payment fee is about $32.
However, there are other implications for missing the due date. If you have a special offer on a credit card, like 0% APR on purchases or balance transfers, that may be rescinded if you miss a payment. This could have a significant impact because now you will pay interest on that balance.
For example, let’s say you transfer a $5,000 balance to a card with 0% APR for 18 months. Unfortunately, you accidentally missed a payment, so your 0% APR offer is revoked. Your new APR is a standard 25%. If you can’t afford to pay off the $5,000 balance in full, you could accrue $1,047.26 in interest fees (if it takes you 18 months to pay off the bill).
In rare cases, the credit card provider may even go after you for deferred interest. This is when the card issuer calculates how much interest you should have paid during the 0% APR offer and then adds it back to your balance if you do something to lose the special 0% APR discount. Needless to say, this can be costly.
Grace Periods on Loans
Grace periods for loans provide you a buffer period after the due date to make a payment without penalties. These are completely different from what grace periods offer for credit cards, so don’t get the two confused.
Although both can be beneficial.
Types of Loans with Grace Periods
Credit cards aren’t the only type of credit product to come with a grace period. Many installment loans have grace periods — including mortgages, auto loans, and student loans. But loan grace periods have a different purpose and function than those on credit cards.
A loan grace period provides additional time after your due date to make a payment before a late fee is charged.
For example, my mortgage lender has a two-week grace period. I can make my payment any time from the first of the month to the 14th without incurring late fees. I choose to pay my mortgage on the 14th so I can keep the money in my interest-earning checking account as long as possible. Auto loans may have a grace period of 10 to 15 days.
Student loans have a different kind of grace period structure. Most of the time, when a loan is disbursed, the grace periods happen each month. However, student loans have two types of grace periods: an initial one after the loan funds have been disbursed to your school and a second one when the loan is finally in repayment.
The second type of grace period only kicks in when you graduate, drop below part-time enrollment, or leave school. Most student loans, including federal and private loans, have a six-month grace period. Once the clock begins, you have six months before your first payment is due.
In rare cases, you can find a private lender that offers a nine-month grace period. However, this option is not available with federal student loans.
For student loans, you should receive a notification alerting you that your grace period is coming to an end and to prepare for your first payment.
When I graduated from college, my main goal was to find a job before the grace period on my student loans ended. I was only working a minimum wage, part-time job, so I knew it would be difficult to afford student loan payments.
Luckily, I managed to land a gig just one month before the grace period ended and my student loan payments began. If I didn’t get that job, I would have had to either file for deferment, switch to a cheaper repayment plan, or ask my parents for help.
Once you start making student loan payments, the payment is due every month unless there are extenuating circumstances.
Impact on Loan Repayment
If you can take advantage of the grace period, then you can use the extra funds to squirrel money away for a rainy day or put it toward another loan that you are already repaying.
Having a solid rainy day fund can bail you out of trouble if you lose your job or have an expensive emergency.
Knowing how a grace period works can also help you avoid late fees, which can be very pricey. For example, the average late fee on an installment loan ranges from $25 to $50. A late fee will typically be charged every time you miss the grace period.
Consequences of Missing the Grace Period
When you miss the grace period on a loan, it’s like missing a payment. You will often have to pay a late fee. Also, if you’re more than 30 days late, it will show up on your credit report as a missed payment. This could result in a huge drop in your score.
Late payments are judged by how late they are, so a 30-day late payment will have a smaller impact than a 60-day late payment. And it can take months or even years for your score to rebound from such a seriously late payment.
You may think your credit card interest rate is already high, but missing your payment can cause the issuer to charge a penalty APR, which will be even higher.
If you are more than 30 days late in paying your credit card bill, you may face a penalty APR. For example, if your current APR is 25%, then the penalty APR could be 30% or higher.
You can find the penalty APR listed on your most recent statement. You can also call your credit card provider and ask them what the penalty APR is and when it kicks in.
Make the Most of Your Grace Period
Maximizing the benefits of grace periods can save you money and help you better manage your finances.
Consumers don’t often get grace from lenders and creditors, so take advantage of these opportunities to ensure you stay on a positive financial path.
Pay No Interest on Credit Cards
If you can pay off some or all of your balance during the grace period, then you can save money on credit card interest. Credit cards have some of the highest APRs around, so it’s crucial to pay as little interest as you can.
For example, let’s say you have a $3,000 balance on a credit card with 20% APR. If you can pay off your balance within the grace period, you will save $50 in interest that month.
But if you make only the minimum payment, not only will you lose your grace period and pay interest, but you may be paying off that credit card for years longer. You also might spend more in interest than what you owe.
Deferred payments are one of the biggest reasons people use credit cards instead of debit cards. When you pay with a debit card, the money is taken out of your account almost instantly. But if you use a credit card, you don’t have to pay up until the due date.
The grace period gives you time to pay the entire balance without accruing any interest — and possibly even gaining cash back or rewards — and giving you financial flexibility in the long term.
This also gives you time to return the item in case you don’t like it or need it. If you return it before the statement period ends, it’s like you never purchased it in the first place.
Manage Your Loan Payments
Most loan providers let you set up automatic payments, meaning the payment can be automatically withdrawn from your bank account on or before the due date. You can schedule your payment to take place on the due date so you can take full advantage of your grace period and not pay before you have to.
In some cases, automatic payments can also help you save on interest. Student loan companies frequently offer a .25% interest rate deduction if you have autopay set up.
When I had student loan payments, my interest rate was 6.8%. However, because I set up autopay, my rate dropped to 6.55%. While this might not sound like a huge difference, it was one of the few ways I could lower my rate without refinancing my student loans.
Avoid Pitfalls and Late Payments
If you take advantage of the grace period on your credit card or loan, you can save yourself a lot of money and stress.
But if you stumble into some late payments, those mistakes can also be compounded if they are more than 30 days late and get reported to the credit bureaus. This can cause dramatic damage to your credit scores, and consequences can start to ripple throughout your financial life.
Here is a timeline of what happens behind the scenes when creditors and lenders don’t receive payment:
| 30-59 Days Late | 60-179 Days Late | 180+ Days Late |
|---|---|---|
| Bank will charge another late fee | Bank continues to charge late fees | Account closed |
| Penalty APR likely goes into effect | Your account may be closed | Debt sold to collections agency or other debt buyer |
| Account reported to the major credit bureaus as late | Accounts later than 90 days considered seriously delinquent | Bank may sue you |
| Your credit score will start to drop | Account may go to collections | Defaulted account remains on your credit report for seven years |
Make sure you read the billing statement every month to know when your due date is. You can also set a recurring reminder in your calendar or, better yet, sign up for automatic payments.
And again, don’t forget that you won’t see a ding on your credit score unless your payment is more than 30 days late — though you may still have to pay a late fee.
Understanding Grace Periods Can Save Money and Frustration
Understanding how a grace period works can help you avoid interest charges, late fees, and even potential negative impacts on your credit score.
Plus, grace periods can vary significantly depending on the type of loan or credit card you have. If you know how to handle your grace periods, then you can enjoy a little breathing room while avoiding late fees and interest charges.
