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Why Your Credit Card's Grace Period Is Your Best Friend

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Interest charges are part and parcel of using a credit card. For the privilege of fronting you cash, lenders tack on interest to the amount borrowed. Credit card interest is calculated daily, charged monthly, at a yearly rate -- typically 19.99% for most rewards credit cards in Canada.

However, there's one way to avoid paying interest on your purchases: by utilizing your credit card's grace period. The grace period is a window, usually 21 days, between the close of a monthly billing cycle and the payment due date for that cycle. If you make a purchase on your card and pay it off within that window, you aren't charged any interest.

Credit card providers aren't required to offer a grace period (though most do), so it's basically a reward for promptly paying off your balance in full. Here's a primer on how the grace period works:

Credit cards have a billing cycle

Credit cards have a monthly billing cycle. As an example, let's say your credit card bill arrives for the billing period between April 5 to May 2. If you look at your credit card statement, you'll see a few dates:
  • Statement date. Also called the closing date. This is the date your latest bill is issued, marking the end of your previous billing cycle. In this example, it would be May 2. This is the beginning of the grace period for the next billing cycle.
  • Payment due date. The date by which you must make at least the minimum payment for the purchases charged on your card between April 5 and May 2. In this example, the due date would be May 23. This is the end of the grace period.

The number of days between the statement date and the payment due date is your grace period -- in this example, 21 days. So if you buy a $300 jacket on May 3 but pay it off in full before May 23, you won't be charged interest on that purchase.

It only works if you pay off your balance in full

If you carry a balance from month to month, the grace period disappears. Not only will you have to pay interest on the $300 jacket if you don't pay it off in full before May 23, but any future purchases begin accumulating interest immediately. To get the grace period back, you have to pay off your entire balance in full and enter the new billing cycle with a $0 balance. If you tend to carry a balance from month to month, the best low interest credit cards> can keep you from being buried by compounding interest charges.

It doesn't apply to cash advances

Unless otherwise specified in your cardholder agreement, the grace period only applies to purchases. Interest begins accruing on cash advances the second those $20 bills shoot out of the ATM -- even if you repay that cash advance the next day, you'll still be charged interest. Cash advances also carry higher interest rates than purchases, usually 21.99% or more, making it one of the worst ways to borrow money. In general, you should avoid cash advances at all costs.

The bottom line

Every card is different, so read your cardholder agreement carefully so you know the exact length and terms of your card's grace period.

As long as it's repaid within that 21 days, the grace period essentially offers a short-term, interest-free loan. Of course, the best habit to get into is paying your credit card bill in full before the statement due date every single month. That way, you won't have to pay any late fees, your credit score won't be damaged by late payments, and you can continue using the grace period to your advantage.

RateHub.ca is an independent financial product comparison site that empowers Canadians to make smart financial decisions by comparing rates on mortgages, credit cards, chequing accounts, savings accounts and insurance.

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