A grace period is the time frame that creditors give borrowers to make a payment without incurring additional interest charges or penalties. For instance, the grace period for credit card accounts is usually between 21 to 25 days while mortgage loans and insurance contracts often come with a 15-day grace period.
How Do Grace Periods Work?
Each of your credit and loan accounts have their own specific grace periods with unique terms.
- Credit Card Grace Periods: When you make a new purchase with your credit card, you may have a specific window of time to pay the new balance in full without incurring finance charges. This grace period is the time period that falls between the last day of your billing cycle and the associated payment due date for that billing cycle. If you pay the new balance in full, the creditor should not charge interest on new purchases during this period.
It’s important to note that many credit cards do not offer a grace period if you do not pay off the balance in full each month. If the balance is not completely paid off by the due date, the creditor may charge you daily interest beginning from the date of purchase.
- For loans, the grace period allows you to delay payment for a brief window without penalties. Typically, no interest is charged and payments made within the grace period should not result in a negative mark on your credit reports.
Most mortgage loans offer a built-in grace period of 15 days. In this case, if your mortgage is due on the 1st of the month, any payment made after the 15th is beyond the grace period and a late fee may be applied to your account.
- For student loans, the term “grace period” usually refers to the immediate months after you graduate or stop attending school full time. This time, typically six months for many federal student loans, allows time for borrowers to find their financial footing before they have to make payments. However, PLUS loans do not extend a grace period to borrowers, who must begin making payments once the funds are completely disbursed.
It’s important to note that lenders do not have to offer grace periods to borrowers, and many don’t. But under the CARD Act of 2009, credit card companies must allow borrowers a minimum of 21 days to pay their bills.
What Happens If I Don’t Make Payment Within the Grace Period?
The contracts for each of your accounts detail what will happen if you make late payments after the grace period concludes.
- Penalties may include a late fee, an interest rate hike, a reduction in available credit or cancellation of a credit line. It’s always best to speak with your lender if you are unable to make a payment because you may have options. For example, you may be able to get a payment deferred.
- When you have a loan with pledged collateral, such as an auto loan, your creditor may seize the asset after missing multiple payments. In fact, most states allow lenders to repossess a car as soon as the payment is late. In these states, there is no grace period to prevent your car from being repossessed.
Will Payments Made Within the Grace Period Affect My Credit?
Lenders usually do not consider a payment delinquent so long as they receive the full payment within the grace period.
Normally, late payments are not reported to the major credit bureaus unless you miss a full payment cycle, which is usually 30 days. When you are more than a month late, it might show up on your credit reports as 30 days late. If you were to miss payments through two billing cycles, it would likely show up on your credit reports as 60 days late.
Each creditor has its own guidelines for offering a grace period and when they will report late payments. If you are unsure about when a creditor informs the credit bureaus of late payments, contact them directly for clarification.
How to Extend Your Credit Card Grace Period
Creditors typically won’t extend a grace period because they are based on regular billing cycles set for all cardholders. However, you may be able to extend the time frame for payment by asking for a change to your billing cycle date. By asking for your billing cycle move back a week, you may, in effect, buy another week before interest is charged – but it is best to clarify this with each lender.
You can also maximize your grace period by making purchases immediately following the closing date of the billing cycle. This practice may give you the most time (30 days) to pay the balance in full and avoid paying interest.
The Bottom Line
A grace period is a specific time frame wherein borrowers can make a payment without getting hit with a penalty or a late fee. Grace periods are not required by law so you may have an account without one. Check the contract language on each of your accounts and read the guidelines regarding each individual grace period.
