What is a Grace period?

A grace period is a period during which a creditor will waive all or most penalties applicable if the loan benefactor is late but pays up during the period. A legal definition for a grace period is "the additional period of time a lender provides for a borrower to make payment on a debt without penalty." Grace periods are often used by insurance firms, utility companies, lenders and credit card companies.

How Grace Periods Work?

Funny enough, grace periods are always as simply as their definition. These periods are often applied in a variety of ways that could have misinformed consumers confused. Some credit card users are made to believe a grace period shelters them from incurring interest on previous purchases. Other card users and beneficiaries of credit and utility services think the grace period is actually when they are supposed to pay up. Though the first instance is correct with some credit cards, the second is almost never true.

Speaking in the context of credit cards, there are three ways a grace period could work.

Full grace period

Credit cards employing this methodology charge interest based on an average daily balance that "excludes" new purchases. This way, cardholders enjoy the benefits of a grace period whether or not they paid in full the previous month.

Typical grace period

A typical grace period charges interest based on an average daily balance that "includes" new purchases. Credit cards' using this method start charging interest on new purchases transactions immediately they are carried out except the previous month's bill was paid in full.

No grace period

A credit card with no grace period calculates the average daily balance including new purchases. Interest is charged immediately whether or not the previous month's bill was paid in full.

Asides credit card companies, other lenders may make use of either one of the three grace periods with a little modification. For example, a utility company charge late fee after the due date while service continues, but other service providers may cut off service until the bills are paid for in full or up to the required percentage.

More About Grace Period

• Finding the Grace Period
• Choosing a Grace Period that works for you