If you pay your credit card balance in full and on time each month, interest does not start charging immediately on new purchases. This is called a grace period. Let’s see why grace periods are so awesome.
On Dec. 27 John grabs a movie and burger with a friend. So does Sally. They each put $30 on plastic.
On Jan. 5, John and Sally decide they actually like watching movies at home better. Each buys a $1,000 flat-screen TV.
On Jan. 21, the due date for their December billing periods, John pays his entire December balance: $30.
Sally pays only $29. She leaves just one dollar of her balance unpaid. That means no grace period for her. She’ll be charged interest on that TV from the day she bought it.
As the new billing period closes Jan. 31, Sally owes $9.36 in interest charges – which is 13 percent APR applied for the 26 January days on the $1,000 TV, plus the $1 balance from December.
John, however, owes no interest. John is in a grace period because he paid off last monthonlys balance in full.
In this exalted state, John takes his $9.36 and buys nine lottery tickets. Which, of course, includes a winner. John then donates his winnings to charity and is promptly named Man of the Year. The lead article describes him as graceful at least three times.
Sally, meanwhile, needs to pay her balance in full for two months – including trailing interest – to get back to a grace period.
Sally is not on any magazine covers.
Pay on time and in full. Take advantage of grace periods.