What is a grace period and how does it work?

When someone gives you grace, they’re giving you a special favor or allowance. In the financial world, a grace period gives you more time to pay before certain consequences kick in. 

Here, we're covering what a grace period is and how you could use your grace period to your advantage when you need to. 

What is a grace period? 

A grace period is a specific amount of time after a deadline when you can still take action without incurring a penalty. 

• On a credit card, the grace period is typically the time between the end of your billing cycle and your payment due date. During this time, many creditors don’t charge interest on purchases. If your credit card works this way, you could avoid interest charges on purchases if you always pay off your balance by the payment due date, even if you made the purchases weeks earlier. Note that not all credit cards have a grace period. 

• On a loan, the grace period is typically the time after your payment due date but before you’re charged a late fee. If you pay during the grace period, there is no negative consequence.

• The grace period on an insurance policy is similar to the grace period on a loan. Some insurers allow you to avoid late fees if you pay within the grace period. An additional risk of missing the grace period is that your carrier might cancel your policy.

How does a credit card grace period work?

When you use a credit card, your grace period typically applies only to purchase transactions. When you use a card for a cash advance or use a check issued by your credit card company, there is no grace period and you’ll be charged interest starting on the transaction date.

Imagine that it's September 1 and your child's soccer fees are due. Payday is still a few days away, so you pay league fees using a check provided by your credit card issuer. Interest starts accruing on that day and continues to build until you pay the balance. Paying interest is one of the things that could make getting out of credit card debt so challenging. 

However, if you charge the fee to your credit card instead, you have until the payment due date to pay the balance off without being charged interest. That buys you more time. 

In a nutshell, with credit cards and other types of revolving debt, the grace period for purchases typically lasts from the last day of a billing cycle until the payment due date. 

How does a loan grace period work?

With installment loans—like mortgages, auto loans, and other non-educational installment debts—the grace period lasts a set number of days after the due date. The length of the grace period can vary by lender, but many installment loans give you an extra 15 days to get your payment in.

Let’s say your vehicle payment is due on the 10th of the month. Your lender may give you until the 25th to make your payment without penalty. 

In a nutshell, installment loans typically allow a certain number of days beyond the due date to make payment without penalty. 

How does a student loan payment grace period work?

Student loan grace periods may also vary by loan type—federal or private.

Federal student loan grace period

Imagine you've spent years in college and racked up federal student loan debt. Most lenders allow you a six- to nine-month grace period before your first monthly payment is due. That's because lenders realize that you may not immediately land a job that enables you to make regular monthly payments. 

Private student loan grace period

Some private student loans require students to make payments while still in school, while others provide a grace period. If a grace period is important to you, check with the lender before submitting a loan application. 

In a nutshell, some student loan lenders (but not all) give borrowers a six- to nine-month grace period before their first student loan payment is due. 

What happens if you miss the grace period?

Missing the grace period is not the end of the world, but it can pinch a bit. Here are some things that could happen when a borrower fails to make a payment before the grace period ends.

• Late fees. Late fees vary by loan type and lender, but all late fees make a loan more expensive. 

• Interest rate change. On credit cards, lenders could end the promotional interest rate if you pay late. Or a penalty interest rate that’s even higher than the card’s regular rate could kick in.

• Loss of grace period. Depending on the lender, you may lose the grace period on future payments. 

• Credit score impacted. All of your activity on a credit account, from on-time payments to defaulting on a loan, could be reported to the three credit reporting bureaus: TransUnion, Equifax, and Experian. Late payments show up as a scar on your credit report and are likely to lower your credit score. 

If you think a payment may be late, your best bet is to contact your lender and let them know what's happening. If there's a good reason, like hospitalization or job loss, they may be willing to work with you and preserve your credit score. 

Tips to make the most of grace periods

Here are a few tips to help you gain the most benefits from a grace period:

• Whether it's a credit card, installment payment, or student loan debt, some lenders don’t offer a grace period. Before assuming there’s a grace period, find out if your lender provides one and how it works. 

• A student loan grace period gives you time to get on your feet financially if you've just graduated. Before graduation day, sketch out a monthly budget to see how much you'll need to earn to repay your student loans and cover the rest of your monthly expenses. That way, you can hit the ground running by the time the grace period ends.

• If you have multiple debts and several are due around the same time, see which grace periods might allow you to spread out payments a bit. 

• If you're going to take advantage of grace periods, make a plan. Remember, late payments can be costly. Set up automatic payments with your bank so you never have to worry about a late fee or damage to your credit standing.