A Credit Card’s Grace Period

There are many benefits of getting a credit card. These range from lucrative sign-up bonuses to highly gratifying reward points and from life and accidental coverage to frequent flyer miles. However, none of these incentives are more useful to the common man than the grace period of a credit card.

credit-card-debtBefore we delve into why the grace period is such a big deal, it is important to understand how credit cards work and differ from debit cards. A credit card looks just like a debit one but functions in an entirely different way. In a debit card, the funds for a financial transaction are deducted from your account on the spot. There is no possibility of getting a loan and stretching beyond your means when using a debit card. On the other hand, a credit card has a monthly billing cycle. What this means is that when you make a purchase via your credit card, you are essentially taking a loan from the bank. As this is a loan technically speaking, you can even buy things that you wouldn’t normally be able to afford. This is the biggest advantage of using a credit card.

As mentioned above, a credit card facilitates your transaction by taking a loan from the bank. Based on when you return this loan, this may have zero or a very high rate of interest. Strictly speaking, whenever a transaction is made via a credit card, you have until the end of the current billing month to pay off this debt. Should you be able to return the funds during this period, you will not be charged a single penny more than the price of your commodity. However, if you are unable to return the money you owe the bank (by either not being able to pay a cent or not being able to pay the bank back in full), your loan will start accruing more and more interest. It is, thus, of the utmost importance to pay off your loan before the end of the current billing month. This period when you have a zero-interest return rate on your loan is technically referred to as the grace period of credit cards.

What we love about the grace period is that it is typically between 21 and 25 days. Thus, you have no pressure to return the sum urgently as you have at least three weeks to reallocate the funds so that you can pay off the bank. In today’s cynical world, even the most microscopic loans fetch gigantic returns due to the hefty interest rates that they demand. This is why the grace period is such a good offer if used correctly. In theory, if you can pay off the bank before the start of the next billing cycle i.e. during the grace period, you essentially have a zero-interest loan agreement, which is always a huge plus for anyone with limited means.

Posted by: admin on Category: Finance