How Credit Card Grace Periods Work

Credit cards are famous for high interest rates. But if you pay off your credit card in full each month, the interest rate becomes purely academic, and you'll have a good amount of time to pay for purchases without interest. That's because of the credit card grace period.

When there's a grace period in effect, you are not charged interest on the purchases you make. The grace period starts with the 21 days between the date your credit card bill is generated the due date of that bill. It's a relatively simple concept, but it can be a little tricky to explain, because whether you have a grace period this month can depend on what you did last month and the month before it.

Grace periods are based on billing cycles

Credit cards operate on a monthly billing cycle, and there are two important dates involved:

• The statement closing date. This is when the credit card company tallies up all your account activity from the past month — purchases, payments, cash advances and so on — and generates your credit card statement (that is, your bill). The statement is usually available online as soon as it's generated. Unless you've selected a paperless option, it will also be mailed to you. Any transactions that occur after the closing date will appear on the next month's statement.

• The payment due date. Under federal law, your due date must fall on the same day of each month, and it must be at least 21 days after the statement closing date. (So while your due date won't change, the closing date might adjust from one month to the next to allow for the required 21 days.)

When you get your credit card bill, it shows two key figures:

• The statement balance. This is the total amount you owed on the closing date — the day the statement was generated. By the time you actually get your bill in the mail, your "current balance" might be higher than the statement balance if you used your card after the closing date. But for the purposes of your grace period, all that matters is the statement balance.

• The minimum payment. You must pay at least this amount by the due date. If you don't, you'll get hit with a late fee.

Here's where the grace period comes in. If you pay your entire statement balance by the due date, then a grace period takes effect for the next billing cycle. Once the grace period starts, you will not be charged interest on new purchases until that cycle's due date. The credit card company is essentially lending you money for free. And of course, if you pay that cycle's bill in full by the due date, the grace period renews for another cycle. Do it month after month, and credit card interest is no longer a concern.

» MORE: Statement balance vs. current balance: What's the difference?

What happens if you don’t pay your full balance

If you don’t pay the full statement balance by the due date, you now have credit card debt and will be charged interest on the remaining balance. Perhaps more important: When you carry a balance, your credit card issuer eliminates your grace period for the next cycle.

That means that not only will you pay interest on the unpaid balance from the previous billing cycle, but you’ll also begin to rack up interest on new purchases immediately after you make them.

The time it takes to restore your grace period through on-time payments of the full balance varies by credit card. You may need to pay your statement balance on time and in full for several consecutive billing cycles to get a grace period back.

If you find yourself carrying a balance most months, then interest will be a fact of life for you. In that case, look for a low-interest card that can reduce how much you pay.

You can effectively double your grace period

As mentioned, the grace period is, in effect, an interest-free loan from your card issuer: You buy things, the card company pays for them, and then you pay the card company back later, without interest. But you can more than double the length of that interest-free loan by understanding your card’s grace period and, if possible, timing your purchases.

Obviously, you can’t always predict when you’ll need to spend. Fixing the brakes on your car or repairing your furnace in the winter can't wait. But if you plan, say, when to buy the plane tickets for your next vacation, you can schedule the purchase in such a way that you have even longer than the 21-day grace period to pay off your credit card before you incur any interest.

If you make a big purchase right after your statement period closes, you have nearly a month before that transaction even shows up on your bill — and then you have the official grace period after that. If you’re careful, you can pay off most big expenditures over a couple of paychecks, without being charged interest and without dipping into your savings account.

For example, if your credit card’s billing cycle closes on April 26, you might buy those plane tickets on the 27th, right at the start of the next cycle. That cycle might end on May 26, and you’ll have the 21-day grace period after that, with the bill due on, say, June 16. In the meantime, if you get paid on the 1st and the 15th, you might have three or even four paychecks between the time of the purchase and the time you must have it paid for.

A word of caution

Any major purchase that you haven’t paid off yet will tie up your available cash. If an emergency expense arises, you run the risk of not having money available to pay off a large credit card bill. Keeping a separate emergencies-only savings account can help keep you out of debt.

If you can’t afford the full payment by the due date, at least make the minimum payment. You’ll begin paying interest and lose the grace period, but you won’t also pay a late fee and risk damaging your credit.

Charging large amounts, while sometimes necessary, could increase your credit utilization ratio, or the amount of your total available credit that you use. This could negatively affect your credit score over time.

Understanding billing cycles can make it easier to time large purchases to take full advantage of your credit card’s grace period. Consider having a backup plan in case you can’t pay your statement off as quickly as you expected.