Know closing date to maximize your interest-free grace period

By  |  Published: March 4, 2017

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
Paul’s credit card closes on the ninth of the month, and his payment is due on the 30th. If Paul purchases a stereo for $300 June 12, how many interest-free days will he have? When will he have to pay for the stereo in full in order to avoid finance charges? – Frank

Answer

Dear Frank,
Your question brings up a money-saving tip a lot of people can use.

If you want to maximize your grace period – the interest-free period enjoyed by those with no balances – you need to know your credit card account’s monthly closing date. By knowing the closing date, you can increase the number of days you can use the bank’s money for free.

Here is the general rule:

  • Credit card purchases just before the closing date have only a short grace period.
  • Credit card purchases just after the closing date enjoy a long grace period.

That is information that could come in handy if you have a big purchase you need to make but may not have the money to pay it all off immediately. By making the purchase right after the closing date, you lengthen your grace period. In that extra time, an extra paycheck or two may roll in before the debt comes due.

Your question illustrates the point. By purchasing the stereo June 12, only a few days after his credit card’s monthly closing date, Paul gets almost 50 days to pay off his purchase interest-free.

The actual number of interest-free days would be 49, if we count the day he purchased the stereo (June 12) and the day his payment is due (July 30).

Had Paul bought the stereo June 8, the day before the monthly closing date, he would have a mere 23 days to pay it off interest-free, since the payment for this purchase would be June 30.

While it is true that one month’s interest on $300 is not significant, even if you have a high-interest card, you should avoid paying more than you have to. If Paul cannot pay the full amount due June 30, he will probably incur $5 to $10 in interest charges if he can pay it off July 30. However, if Paul chooses to take the maximum time to pay off the purchase, this amount will grow. The minimum payment on a $300 balance would only be around $25, but would take 14 months to pay off and cost an additional $28 assuming the March 2017 average credit card interest rate of 15.50 percent.

I want you to be aware of your purchasing power when it comes to getting the most for your money. If you are contemplating a large purchase using a credit card, know when your card closes for the month. By doing what Paul did and putting off the purchase until just after that date has passed, you will buy yourself almost an extra month to come up with the funds needed to pay the purchase off interest-free.

My advice for using credit cards is to try to charge only those purchases that you can afford to pay off by the end of the grace period. While I know that this is not always possible, being aware of your grace period and using it to your advantage is simply a good financial practice. When it is not possible, try to pay as much as you can every month over the minimum to reduce both the interest you will pay and the amount of time it will take you to pay off.

Remember to always use your credit smarts!

See related: How to use your grace period to avoid interest

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Updated: 10-23-2017

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