Grace Period — is a period during which the bank doesn’t charge interest for payments effectuated using the borrowed funds from the credit card. If clients repay the resulting debt before its end, they can use the loan for free. For many banks, to activate the grace period in the new month, it is necessary to pay off the debt of the previous billing period. A card with this option is a suitable alternative to consumer loans.
Definition of Grace Period
The grace period is a time when the borrower can pay the arrears without interest. A credit card with such a period resembles a non-purpose consumer loan, but there is a difference. Interest is charged not on the entire debt, but only on the number of transactions performed. With grace periods, a client can avoid paying them if they return the money to a credit card account before the end of the period. Cards are quickly issued, and a minimum package of documents is required. Credit programs provide bonuses and discounts in different stores.
It is necessary to distinguish the grace period and deferment. Deferment is a time when a client can’t pay for credit due to financial problems. To receive the deferment client is obligated to make an application and provide the necessary documents. During this time the interests are still accrued.
Almost all banks limit the number of transactions subject to the grace period. Usually, the grace period applies to paying for goods and services using credit cards in offline and online stores. Also, interest-free time often covers the transfer of an annual commission for using a card product.
The grace period doesn’t cover the following operations:
- cash withdrawal;
- payment for gambling;
- transactions to the electronic wallets;
- purchase of cryptocurrency;
- payments over the grace period.
From the client’s point of view, the grace period is a time when the bank allows them to use the money for free. In return, if the card debt repayment period is exceeded, the client pays an increased rate, which compensates the bank for the costs. But it’s not so simple. Credit card rates for non-cash use of funds aren’t much higher than the base rate for consumer loans. The increased interest is charged only for cash out.
How bank makes money on grace period:
- A financial institution receives a percentage from each non-cash transaction from the payment system in which the card was issued.
- The owner of cards with a grace period pays for the SMS-informing this money goes to the bank.
- Grace period increases the loyalty to the bank. If a client has a credit card in a certain bank, they will probably take a loan or mortgage in this bank because they have a positive experience related to this.
- By providing a large interest-free period for credit cards, the bank expands its client base. Often, clients change the service bank to obtain favorable conditions.
- The bank earns a percentage of the debt on clients who don’t close the credit card during the grace period.
How Banks Count Grace Period
Usually, the grace period is 50-60 days. This period isn’t calculated separately for each transaction, it is valid from a certain day of the month and indicates the number of days allotted for debt repayment. Sometimes banks require the client to make a minimum payment in the grace period — up to 10% of the amount owed. Otherwise, they receive a penalty for delay.
Each bank uses its way to calculate the grace period. Some banks count the grace period from the fixed date. Others start it from the first purchase. Sometimes the grace period can be started solely for each purchase.
Types of grace periods:
Variable grace period. In this case, the period is related to a certain date: the first day of each month, the day of the first transaction, issue, activation of cards, or the formation of a monthly statement. The reporting date isn’t tied to each purchase.
The variable grace period consists of two timespans:
- Calculation period. It’s a period when the bank generates for all transactions made via the credit card.
- Period of payment. It’s a period when the client needs to pay the arrears to avoid the interest accrual.
Fixed grace period. In this case, the grace period starts from the date of purchase. This is a convenient scheme for cardholders, especially if there are few transactions or the client uses a credit card occasionally. If the client repays the debt on time, no interest will be charged.
Grace period for separate operations. This scheme is rarely used. Repayments should be carried out strictly by periods, in the same order as the purchases. This option is convenient when the client uses the card infrequently, otherwise incorrectly calculated terms will lead to a penalty.
To avoid the interest accrual the client should regularly check the balance and make the payments regularly. Also, they can access the service of informing via SMS or PUSH-notifications to know when the grace period is ending. To increase the grace period, the client may participate in the loyalty program, if any.