Grace Period

A grace period is a stretch of time during which a borrower can pay without being charged interest or treated as late. The best-known example is on a credit card: the time between the end of a billing cycle and the payment due date, during which new purchases accrue no interest if the whole statement balance is paid in full. The idea also appears in loans, insurance policies and subscription billing, each with its own meaning.

On cards, the grace period is what makes it possible to use revolving credit for free: a cardholder who always pays in full never sees a finance charge on purchases. It is distinct from a late-payment allowance, which only delays a late fee, and from a promotional 0% rate, which is a separate offer often attached to a balance transfer.

Imagine a café that lets regulars run a tab for the month and settle it on the tenth of the next month. If you settle the whole tab by the tenth, you pay only for the coffee. That breathing room is the grace period.

The deal comes with a condition. If you only pay part of the tab, the café starts charging a small fee on everything you still owe, and also on each new coffee from the day you order it, until you clear the tab completely. Paying in full keeps the free window open; leaving a balance closes it.

Each statement closes a billing cycle and shows a due date. If the cardholder pays the full statement balance by that date, the issuer charges no interest on the purchases in that statement. The key rules and practices are:

• A grace period is not required by US law; most cards offer one on purchases, but the card agreement decides.
• When a cardholder carries a balance past the due date, interest is charged on the unpaid amount and, usually, on new purchases from the day they are made. Issuers then require one or more cycles of full payment before the grace period returns.
• Cash advances, and usually balance transfers, accrue interest from the transaction date with no grace period.
• Paying the minimum payment avoids a late fee but does not preserve the grace period.

Because of the 21-day statement rule described below, a US card grace period is in practice at least three weeks long. In the UK, card issuers often advertise "up to 56 days" interest-free, counting from the start of the billing cycle rather than its end.

The Credit CARD Act of 2009 and Regulation Z added protections around the grace period:

• Card issuers must mail or deliver statements at least 21 days before the payment due date, and a payment received within that window cannot be treated as late (12 CFR 1026.5(b)(2)(ii)).
• For other open-end plans that offer a grace period, the statement must go out at least 21 days before the grace period ends.
• When a cardholder loses the grace period, the issuer may not charge interest on balances from earlier billing cycles, a practice once known as double-cycle billing, or on the part of the balance repaid within the grace period (12 CFR 1026.54).
• The due date must fall on the same day each month.

The Consumer Financial Protection Bureau writes and enforces these rules for large issuers.

Outside cards, the term usually means a period after a due date, or after an event, before penalties or repayment begin:

• Instalment loans and mortgages often allow a number of days after the due date before a late fee is charged; the length is set by the loan contract and state law. A payment inside that window is still late in contract terms but carries no fee, and US lenders generally report a payment to the credit bureaus only once it is 30 days or more past due.
• US federal Direct student loans have a six-month grace period after the borrower leaves school or drops below half-time enrolment before repayment begins; interest accrues during it on unsubsidised loans.
• Insurance policies give a grace period after a missed premium during which cover stays in force, with the length set by the policy and state law.
• Subscription and recurring payment systems give customers a grace period after a failed payment, keeping the service active while the merchant runs payment retries.

In project and development finance, a grace period on a loan is a time at the start when the borrower pays only interest, or nothing, before amortization of principal begins.

For cardholders, the grace period is the difference between a free short-term loan and an expensive one. Someone who pays in full every month pays no interest on purchases at all. Someone who carries even a small balance loses the grace period, so new spending starts costing interest at once. A late payment also risks a fee, a penalty APR and a negative entry on a credit report, which can lower a credit score.

For lenders, the grace period is a cost: interchange and other fees must cover the funding of balances that pay no interest. It is part of what lets card issuers compete for customers who never pay interest at all.

• 12 CFR 1026.5 — General disclosure requirements (Regulation Z)
• 12 CFR 1026.54 — Limitations on the imposition of finance charges