If you're in debt right now, heed all of our yammering about the hazards
of minimum payments and creeping interest rates. But if you pay off your
oustanding balance every month, the grace period is the first thing you should
note when shopping for a lender.
The grace period is the time between the close of your billing period and
the date your payment is due. This float time is usually around 20 to 30
days long.
If you do pay off your card every month, we'd first like to applaud you.
(Fools the world over are rising, removing their jester hats, and clapping
wildly.) Your grace period enables you to take out a short-term loan from
your lender when finance charges do not accrue.
If you do not pay off your balance each month, read the next paragraph twice...
and out loud: Those who don't pay off the entire balance every month get
a double whammy -- they pay interest on the balance that they did not pay
off, as well as interest on every new purchase as it is posted to the account.
Ouch. (There are many cards that exclude new purchases when they calculate
interest. If yours doesn't, and you often carry over a balance, find one
that does.)
If you are going to pay your bill late, call your lender and find out how
much you will be charged and include that amount in your check. Otherwise,
the fee will appear as a balance that rolls over to the next month, eliminating
the grace period.
One Fool wrote to us about what she thought was a questionable finance charge
on her card. When she paid her bill, she mistakenly made out her check for
one penny less than the total of the amount due. That penny carried over
to the next month's billing cycle, eliminating her grace period. She was
charged interest on the entire amount of the previous month's bill. All because
she was short one penny!
There is usually no grace period on cash advances. On top of that, lenders
often charge a higher interest rate for this "convenience." So on top of
the fee you'll pay to get a cash advance -- typically around 2% of the total
-- you'll pay a higher interest from the day you get it.
Two-cycle billing also cancels out the grace period. If you have a balance,
your lender will include the prior month's and current month's activity to
compute the average daily balance against which interest will be charged.
A final note: Watch out for lenders who pull the grace period out from under
you -- especially if you are a "freeloader," someone who pays their balance
in full every month. Remember, if your grace period is eliminated, you'll
accrue interest from the day you make a purchase. The only way to avoid a
finance charge would be to pay your bill before you received it. Hats off
Now that you've got a card with a reasonable interest rate and a lengthy
grace period, let's look at some of the
perks your creditor would like you to use.
-- Dayana Yochim (TMF School)
Next: Don't Pay for Perks »
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