How do grace periods on credit cards work?

October 5, 2005 9:33 AM

How do grace periods on US credit cards work and how can I avoid paying finance charges?

I recently got AMEX and Citi "cash back" cards to use for all of my regular purchases. I plan to pay off both in full every month and reap the cash back benefits, but reading about grace periods leaves me wondering. Both have a 25-day grace period. The common definition that I know is that a grace period is the period after a purchase is made during which interest is not charged. So, to me, it seems that it is impossible to avoid finance charges on items I purchase at the beginning of my billing period, unless I pay off the card off twice a month (which AMEX doesn't let you do online!). This seems at odds with the fact that I've always heard that if you just pay your bill in full by the due date each month, you won't be charged interest. Am I misunderstanding things?

posted by zsazsa to work & money (7 comments total)

Here's how it works, they send you a notice "Payment due by..." and you have to pay by them to be in the clear. Regardless you have to pay a minimum amount (usually trivial, $10). Pay by the due date and you'll be fine. Usually mine lags a month behind, so if I buy a $250 phone now it won't show up until I have to pay it by November 20th or whatever.
posted by geoff. at 9:43 AM on October 5, 2005

Pay your bill in full by the due date each month and you won't be charged interest.

Watch for sudden disappearing grace periods, though. Like mine, which apparently dropped from 24 days to 17 days in June. Considering it takes them nearly a week after my bill cuts to actually get it to me, the practical grace period is now 10 days. Nice of them to let me know. Bastards.
posted by jacquilynne at 9:46 AM on October 5, 2005

Grace period starts from the statement closing date. You get the bill, you pay the total, you never pay finance charges. Just don't use the card as an ATM card, whcih screws up this simplicity.

This is all spelled out in excruciating detail in your Cardmember Agreement, which for some reason is generally not available online.
posted by smackfu at 10:30 AM on October 5, 2005

I have both AmEx and Citibank cash back credit cards, and do exactly what you plan to. The other posters are 100% correct. I believe the "grace period" refers to the time between your statement closing and payment being due.

which AMEX doesn't let you do online!

Sure they do. Last cycle, I paid my AmEx bill online no fewer than 10 times--so I could spend more than my credit limit in a single month. More cash back. AmEx also seems to have figured out what I was doing and raised my limit by $8k for the next month!
posted by trevyn at 10:35 AM on October 5, 2005

"25-day grace period" means you have a minimum of 25 days after a purchase is made to pay it off without paying interest. Buy immediately after your statement closes and you will get more like 45 days. Careful timing can pay off.
posted by kindall at 10:54 AM on October 5, 2005

For American Express, the rules recently changed:

As of May 4, 2005, the company did away with its grace period on new purchases when you carry a balance.

Say you charge $1,000 one month, and you pay half the bill and then add $200 in new charges. Typically your finance charge would be assessed to the $500 balance you did not pay off, while those $200 worth of new purchases would be subject to the grace period. Not anymore. Carry a balance and that $500, as well as the $200, will be subject to a finance charge.

"In order to avoid finance charges, you have to pay [your balance] in full by your due date," said Desiree Fish, spokeswoman for American Express.
posted by WestCoaster at 11:15 AM on October 5, 2005

Great answers, all, and good news to me. Understanding that it is the minimum makes things clear.

trevyn, I must have been confused by the fact that they only let you pay off the last statement's balance, not including the current activity.
posted by zsazsa at 11:27 AM on October 5, 2005