• How to Use the Credit Card Grace Period to Avoid Paying Interest

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    There comes a time in all our lives where we can’t help but miss our due date on our payments. There are numerous reasons for this, the most obvious ones however, are either due to negligence or financial stress. But what many of us don’t know is that all credit card companies offer a grace period when you miss your first deadline and give you a bonus period that is completely interest free. If you capitalize on this grace period and make the payment before the grace period elapses, you can save a lot of money that you would otherwise spend on your interest payments for missing the first deadline. However, what you must know is that this grace period is only interest free if you make the payment before the due date.

    What is a credit card grace period on a payment?

    A grace period typically the period that starts from the end of one billing cycle to the due date of that cycle. This window of time give you the opportunity to make the full payment on your balance by the due date provided to you because after this date the trigger on the interest will be released on your new purchases while on the current billing cycle. To avoid this trigger, you must make the payment of your statement balance in full on a consistent basis. Settling your monthly balance in full consistently is not very hard once you make a habit of it. Although, once you break out of this habit, regaining the benefits of your grace period can become tricky because you will be carrying a part of your balance on a month on month basis. What you must know here is that unlike many other purchases such as balance transfers, convenience cheques, cash advances etc. when you start missing payments on your credit card, the interest starts to build immediately and the earlier you make the payment, the faster you will rid yourself of the interest.

    How does the grace period work?

    In the strict sense, card issuers do not necessarily have to provide a grace period on their credit card, but almost all credit cards today come with a grace period. Usually, the grace period falls anywhere between 25 to 30 days. If the due date for your payment falls on a weekend or a public holiday, then the next business day will be considered your due date for that month. Under this circumstance, it will not be considered a late payment or an extension. This goes for all credit cards that come with a grace period. But, for the fewer credit cards that do not come with a grace period, your statement balance will be mailed to you weeks before your deadline so you can make the payment accordingly.

    The benefit of the grace period can be captured when you start making your payments in full and not restrict yourself to just make the minimum payments due each month. A huge fraction across the world stick to making minimum payments and do not realize their interest compound on a regular basis until they are waist deep in debt from their compounded interest. Gone are the days when man sat down with a pencil and paper making calculations of the interest you owed on a daily basis, that is what computers are for today. The banks need to simply input numbers or algorithms and voila! they have your compounded interest calculated on a day to day basis. The smarter fraction of the society, never lag on their payments and when they make their full payments on time, they enjoy the added benefits of the grace period and even qualify for additional features on their cards such as loans on their credit cards.

    Carrying forward your balance to the next billing cycle

    When you carry forward your balance from one billing cycle to the next, you have kissed goodbye to your grace period. You will not be granted a grace period on the purchases you make during that cycle. This means that once you have carried forward your balance by making a minimum payment or not the full payment on the statement, your credit card company will immediately start charging additional interest on the purchases you make. Here what you must understand is that it does not matter how much balance you carry forward to the next month because as long as you carry forward even S$ 1, your grace period benefits would have elapsed and you will still be paying interest for that S$ 1 starting from that billing cycle and however measly that S$ 1 seems to you, when the interest slowly starts to accrue, there is nothing measly about it anymore.

    Recovering from missing payments

    When you have started missing payments or have only been making minimum payments on your credit card statements and you have finally decided to straighten up your act, it might take a few months to pay your balance in full because it takes time to get off your interest treadmill. Once your grace period has been taken away due to your missed payments / late payments / minimum payments, depending on your credit card company, you will have to make full statement payments for the next few months in order for your grace period to be reinstated.

    During this period try and avoid using your credit card as much as possible because when you are already carrying forward your balance, your balance is on trailing interest. A trailing interest period is the time from when you receive your credit card bill and when you make the full payment for it. This is also known as residual interest. During this time, if you continue using your credit card, you are using up the balance even before you have the chance to pay it off completely. Say you have paid the full statement balance for the current month, but your interest is still accruing because you have not paid your complete statement balance the previous month. Settling your new balance does not give you a pass on your previous balance.

    To get a better understanding of how you can reinstate your grace period, you will need to take a look at your credit card agreement.

    How to move on from trailing interest?

    If you have set your mind to stop evading your monthly card payments, then you can get a jump on getting rid of the trailing interest with some effort to save enough to make some ready funds available to start reducing your balance and depending on how much interest you have accrued and how much money you have saved, you can rid yourself of this treadmill debt anywhere between 1 and 6 months. You will need to start by taking baby steps that is as and when you start getting your new monthly statements, you can immediately go online and pay the full balance via online statement. This will stop the interest from trailing for the current month spilling into the next billing cycle. Then, depending on your card agreement just start making full payments until the grace period gets reinstated.

    You need to be extremely vigilant about checking your statements each month. Say, you have paid your current statement balance in full this month and the next month you have forgotten to check the exact amount due thereby missing a few S$s from the payment. Your negligence has now cost you in accrued interest for those few S$s that you have missed. Until you once again check your statement, even without your knowledge, depending on how much time has elapsed for you to notice that you have missed those few S$s from your payment, you might once again lose your grace period benefits.

    Interest on disputed charges

    Now this can be tricky. When you are disputing a charge and it is part of your current billing cycle, you can choose to not pay for it until the dispute is settled, however this will be a risk that you are taking because if the dispute does not turn in your favor, then you will be left to pay interest on the disputed purchase because technically you have missed the deadline on the payment for it. But, each credit card company has different rules and guidelines when it comes to settlement of disputes and whether or not they will have an impact on your grace period. Generally, the grace period on the other purchases are deemed safe and interest free and that the disputed amount will not bear an effect on it.

    With charge backs this principle works quite differently. If you are not satisfied with a purchase and have decided to return it, if their company policy does not entitle you for a refund, then this charge will still wind up back into your next billing cycle with interest. The same principle applies in case of refund through reward points or store credit. As the refund is not made directly into your bank account, you are still liable to make the payment for that purchase.

    Grace periods are usually granted to those who maintain a healthy credit card relationship with their card issuers. Benefits of any kind never come for free and we must learn to not abuse them or take them for granted when we are given such privileges. These benefits are to make our lives simpler, not for us to take a shortcut because they will come back and haunt you in the long hall.

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