Avoid paying interest during your card's grace period

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question Dear To Her Credit,
When I pay back my first balance on the credit card on the due date and then spend the same amount again, aren't I basically re-spending my own money?

And then why does it make any difference if I pay the whole balance off by the statement date and then respend the money, or if I just make the minimum payment? It seems like if there’s no interest when I pay the whole thing off and then charge on it again, it should be the same. – Lynn

Answer

Dear Lynn,
You’re actually re-spending the bank’s money, not your own. If you had a prepaid credit card, and you did basically the same thing, you would be re-spending your own money.

I do see your point about wondering about the difference between carrying a balance forward through two billing cycles versus paying it off and then “re-spending” the money. Either way, the daily balance on the card is never $0, yet one way you pay interest, and the other you don’t.

The difference is in whether you take advantage of the “grace period” most credit card companies offer, under which you can pay your balance by the due date and pay no interest.

In fact, the grace period is like a free short-term loan. You can spend $1,000 today, and the bank pays the merchant on your behalf. Then, after the statement period ends and you get your bill, you get around to paying the credit card company. The bank may have to pay the merchant several weeks before you reimburse it.

Before you feel too bad for the credit card company, remember they charge merchants for their services. And a large percentage of the bank’s customers pay a lot of interest expense because they do not pay their balances every month.

Grace period rules are not the only slightly quirky things affected by how much you pay and spend in one credit card statement period.

For example, say your minimum payment is $100. If you miss the $100 payment because you needed that money to pay for living essentials, you are delinquent and subject to late fees and other repercussions. However, if you make your $100 payment, and then spend an additional $200 for those living expenses on your card and then pay that off by the due date, you’re a great customer in good standing (assuming you haven’t maxed out your credit limit).

Borrowing and repaying your credit card bill on time, in addition to not carrying a large balance, is one of the most important things you can do to build up a great credit score. The card companies report your payment behavior to the credit bureaus, and payment history is the most important component of your credit score.

Not everything in the credit card world makes absolute sense – at least not in every circumstance. The important thing is to know how credit card rules work. That way, you can plan ahead and make the wisest possible use of your money and your credit.

See related: Know closing date to maximize interest-free grace period, FICO's 5 factors: The components of a credit score

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Updated: 10-23-2018