Posted by William Charles on June 5, 2014
Consumer Credit

Published on June 5th, 2014 | by William Charles

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Grace Periods Explained

A grace period is usually the amount of time after a loan is due payment can be made without any penalty being applied. It can also be the interest free period. The definition of a grace period really depends on the situation it is used in. It’s important to read through the fine print of any contract that specifies a grace period to fully understand what this period entitles you to and what the consequences are of paying within or outside this time frame. We’ve taken a look at the most common uses of grace periods and the definitions in those situations.

Credit Cards

The grace period on a credit card is the amount of time between the end of the statement cycle and when payment is due. The length of this period varies from card to card and can be found in the cardholder agreement (often under pricing & terms, terms & conditions, rates & fees or similar) on any credit card application page. The CARD act of 2009 added a clause that states that any card issuer that offers a grace period must have procedures in place that ensure any bills are mailed 21 days or more before they are due. Most grace periods are between 21 & 26 days for credit cards. Your payment due date must always been the same each & every month and you have 5PM at least to make payment, if this payment date falls on weekend or public holiday you are automatically given until the next business day.

During the grace period on a credit card no interest charges or late payment fees are charged. If you pay your statement outside of this grace period then you’re liable to pay interest on the full time frame, not just the period after the grace period expires. The grace period period on a credit card starts immediately, not when the bill is received by the card holder.

Example 1: You make a purchase of $1,000 on January 1st, your statement closes on the 15th. You have a 23 day grace period and as such your payment is due on February 7th. Assuming that’s your only purchase and you do not have a balance from the month before you have until February 7th to make a payment of $1,000 to avoid any interest or late fees being charged.

if you have a credit card with a 26 day grace period and your statement closes on January 1st, you’ll have until January 27th before the grace period expires. If you pay after this date you’ll be charged interest from the 1st of January (not the 27th) and potentially you’ll also have to pay a late payment fee.

Grace periods on credit cards will usually not apply to balance transfers or cash advances (which often have their own separate APRs as well) and interest will be charged immediately on these. Most cards will also have a separate late payment APR which you must pay if you don’t make the minimum payment necessary before the grace period expires. Grace periods will also not apply if you carry a balance month to month and just meet the minimum payment requirements.

Example 2:  You make a purchase of $1,000 on January 1st, your statement closes on the 15th. You have a 23 day grace period and as such your payment is due on February 7th. You already have a balance from the previous month and as such your card does not come with a grace period meaning you need to pay interest fees on the $1,000 purchase. If you pay this on the 7th of February you’ll be charged 38 days interest.

Example 3:  You do a cash advance of $1,000 on January 1st, your statement closes on the 15th. Your card does not offer a grace period on cash advances and as such you’ll be charged interest immediately. You’ll also likely be charged a higher interest rate and a cash advance fee.

Insurance

Most insurance policies have a grace period, this is the amount of time that you’re still covered even though you’re late paying the premium. This grace period doesn’t mean you’re absolved of any late fees or penalties, it just means that in the event you need to use your insurance for a claim you’re able to even though you haven’t paid your premium.

Mortgages

Most mortgages will say something along the lines of “payment is due on the 1st and not considered late until the 15th”. This is a mortgage grace period. Mortgage lenders give you this 14 day grace period to account for the length of time it might take for the funds to reach them, this helps avoid disputes (“But I sent the payment on the 15th!!”) and gives both sides a margin of error.

Unless you have a simple interest loan which accrues interest daily (most mortgages are not simple interest, they are amortized), there is no advantage paying your mortgage on the 1st in comparison to the 15th. That said it’s also not advisable to pay your mortgage at the last minute either, as this doesn’t leave any margin for error and a late payment on your mortgage can be disastrous for your credit score. Although most mortgage lenders will not report late payments until a payment is 30 days past due or more.

We’d recommend always giving yourself leeway when paying your mortgage to avoid any possible complications, having your mortgage payment for an additional 14 days isn’t worth the potential risks. Paying early will also reduce the chances of you being late and having to pay a late payment fee.

Rent

Most rental agreements specified that rent is due on the first of the month and must be paid in full one month in advance (this is in addition to any security deposit and first & last months rent they may take when you sign the original rental contract).

Rental agreements typically do not contain grace periods, if rent is due on the first then your rent payment must be received on or before the first otherwise payment will be considered late and you’re be liable for any late payment fees. Most rental contracts will provide provisions for what happens when the 1st of the month (or whenever rent is due) falls on a weekend of public holiday, in most cases this will cause rent to be due the next business day but obviously there is a lot of variation.

If you pay your rent late, your landlord is entitled to give you a pay or quit notice one day after rent is due.

If a rental agreement does contain a provision for a grace period, this will be for no more than 5 days. Usually grace periods for rent are only in contracts where state laws specify that a grace period must be offered. The following states have these laws:

We’ve done our best to ensure the above information is up to date and correct, but state laws are constantly changing and it’s difficult for us to stay on top of these changes. We’d recommend doing a Google search for <your state> rental grace period and reading the results along with a copy of your rental agreement which will clearly spell out any grace period offered. If you know the state law and it differs from the above (or your state isn’t included) let us know in the comments section or contact us.

Student Loans

The grace period on a student loan is the amount of time after graduating a student has until they must begin loan repayments. In some cases it’s possible to use up your grace period before you graduate, this happens when you drop to less than half time student status for a period of 181 or more days, again this will vary loan by loan.

Generally federal loans come with a grace period of six months, although this varies from loan to loan. Some loans will charge interest during late periods whilst others will not. It’s best to pay your student loans during the grace period as your payments will apply to the principal, reducing it and future interest charges on the loan.

If you’re active duty in the military this grace period can be extended up to a period of three years.

Student loan type Length of grace period Interest accrues
Federal subsidized Stafford loans made on or before July 1, 2012 6 months No
Federal subsidized Stafford loans made between July 1, 2012 and July 1, 2014 6 months Yes
Federal subsidized Stafford loans made on or after July 1, 2014 6 months No, although this may change
Unsubsidized Stafford loans 6 months Yes
Perkins loans 9 months No
Graduate and parent PLUS loans 6 months Yes
Other loans Varies Generally yes, check the fine print on your loan

Utility

Utility companies offer a grace period, this relates to the amount of time they’ll wait between non payment and shutting down your service. You’ll still be liable for any late fees that are incurred if you pay within this grace period but you’re service will continue to operate until the grace period expires.

For example, let’s say that your electricity bill is due on May 1st and there is a three month grace period. If you pay the bill after May 1st your payment is late and you will be charged late fees and risk having this late payment recorded on your credit report. However your electricity will not be cut off August, 1st which is when the grace period expires.

There are usually a lot of individual state laws which govern how long grace periods must last for in these situations. It’s always best to call the utility company and explain your situation and offer a potential solution. For example, you could offer to set up a payment plan. This will keep the company in the know and hopefully make them more sympathetic to your situation, it can also be useful in reducing any fees incurred.



One Response to Grace Periods Explained

  1. Adrian says:

    Knowing your grace period and your billing cycle closing date is IMO a critical technique with MS. I personally use 3 cards right now for MS. I only use them after their billing cycle starts. That gives me the 30 day billing cycle window to run charges through and then pay off before the cycle closes. If there is a hick up I will have a balance report, but generally I will have the funds pending payment anyway.

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