A frequently asked question in the credit world is what is a grace period? And how does it affect your credit scores?
Here is information on how a grace period works, what it means, and the impact it can have on bad and good credit scores.
Statistics from Forbes show that during the COVID-19 pandemic, 75% of Americans missed credit card payments, and only 29% of cardholders understand their credit card benefits.
So, here are some essential things you need to know about it.
What Is a Credit Card Grace Period?
A credit card grace period can be defined as a fixed amount of time in which your credit card debt incurred no interest and allows you to pay up your balance without being charged.
Credit card grace periods depend on the lender and the kind of debt incurred. It all depends on the plan you have with the credit card company.
When credit card bills are paid on time, the company that issued the card stops adding interest on new purchases and your grace period continually renews.
Until the due date of the grace period is over, you are not charged any form of interest. Insurance companies and mortgage loans also make use of grace periods.
Credit card grace periods tend to be around 21 days but can be more sometimes. Depending on your card issuer, your grace period may differ. This period of leniency granted by credit card companies are beneficial in preventing late payments and increasing interest fees.
If you’re running slightly late on your bill payment, this period of grace is a way to help avoid negatively affecting your credit report and scores.
How Does a Grace Period Work?
When you pay off credit card debts at the right time, the interest usually added to the debt stops, and you have a period where you can purchase anything without interest. This period is what is known as the grace period.
The moment your grace period is in effect, no interest can be charged for any purchase.
On a credit card, the grace period is the time between the end of your billing cycle and the due date for payment. The period when your credit card company adds up all account activity for the previous month and generates a credit card statement is known as a statement closing date.
This date is when all your payments and purchases for the previous month are tallied. Any transaction after this date will be added to the next month’s statement.
According to federal law, the due date for payment for every credit card must be at least 21 days after the statement closing date and fall on the same day each month. Hence, if payment is made by the due date, a grace period is granted to the cardholder for the next billing cycle.
During this grace period, no interest charges are made on purchases until the cycle’s due date.
This means that during the grace period, the credit card company is basically lending money to you for free with no interest. Also, grace periods can be renewed, so if you pay the bill for that cycle by the due date, the grace period renews for another cycle.
However, grace periods only apply to purchases and not cash advances or credit card checks. Credit card companies are not legally required to grant grace periods to their customers, but most issuers tend to provide this service.
With proper credit monitoring, you can increase the length of grace periods. By properly planning your purchases, you can make sure that there is no interest incurred during the periods you purchase goods or services.
In situations where you cannot afford the full payment, it is advisable to make the minimum payment. Even though you might lose the grace period, you won’t negatively impact your credit score or pay a late fee.
Does a Grace Period Impact My Credit Scores?
Late payments can only be reported to credit bureaus when the amount is unpaid for 30 or more days. In most circumstances, any payment made during a grace period does not affect the card holder’s credit.
If the cardholder does not pay the due payment during the grace period, they can incur interest and late fees on the account they hold.
If the payment is still not paid 30 days or more after the due date, the lender or creditor has the right to report the cardholder to the three major credit bureaus in addition to interest and late fees. Bad payment history can then reflect on the holder’s credit report, which then negatively affects credit scores.
In addition to the late fees that can be accrued due to late payment, other consequences might be incurred on the credit debtor, such as an increase in the interest rate and considerable negative affect to the credit score of the debtor.
One way to keep an eye on your credit scores is to sign up for a credit monitoring service, such as MyScoreIQ. A credit monitoring service can help you know if missed payments are listed in your credit report.
Bottom Line
Grace periods granted by credit card companies are a specific number of days where no interest is accrued for purchases made by a cardholder. A credit card grace period is usually around 21 days or more and is only granted if the cardholder makes their payment in due time.
A credit card grace period is the time between the end of a billing cycle and the due date for payment. No credit card company is obligated by law to grant customers grace periods, but a grace period is offered by most of them.
During credit card grace periods, a cardholder’s credit score is usually not affected. However, if payment is not made by the due date, creditors can report the debtor to the three major credit bureaus, negatively affecting their credit scores.
