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How the grace period on your credit card can affect the card’s cost to you

The different terms and conditions offered by credit card issuers can be confusing. Consumers who are selecting a credit card may focus on its yearly fee and its annual percentage rate (APR), while paying little or no attention to how the grace period will affect its cost.^*

What is a grace period?

A grace period is the time you have before the credit card company starts charging you interest on your new purchases – usually a period of 20 to 25 days. But some cards begin charging interest immediately – unless you have paid off your credit card in full the previous month.

How do grace periods differ?

If you already have a credit card, look at the back of the monthly statement where it describes the balance calculation method.

• A card with a typical grace period describes the balance calculation method on the card statement as the “average daily balance including new purchases.” You pay interest on all new purchases immediately, unless you have paid your previous month’s bill in full.
  
  
• A card with no grace period also describes the balance calculation method as “average daily balance including new purchases.” But there’s a difference – you will pay a finance charge from the date of each transaction, even if you have paid your previous month’s bill in full.
  
  
• A card with a full grace period lists “average daily balance excluding new purchases.” New purchases are not included in figuring the amount of interest you owe for the current month. Unlike the typical grace period described above, you get the benefit of the grace period, even if you have not paid off your balance in full the previous month.

The grace period that’s best for you

Knowing more about grace periods can help you adapt your spending and payment habits, and keep your total cost of credit under control.

If you always pay your bill in full every month...

• You will never pay interest, as long as you choose a card with a typical or full grace period.
  
  
• But, you should avoid choosing a no grace period card because then you would unnecessarily pay interest on all purchases immediately.

If you sometimes pay your bill in full, but sometimes don’t...

• You will benefit most from a full grace period card because you get a break on interest every month, whether or not you have an unpaid balance.
  
  
• You will benefit from a typical grace period only during those months when you have no unpaid balance.
  
  
• You will never benefit from a no grace period card.

If you never pay your bill in full...

• You will benefit most from a full grace period card.
  
  
• You will never benefit from either a typical or a no grace period card because you will always pay interest on your new purchases.

Further details on grace periods are available at the American Express Web site.

* These are generalizations based on grace period savings alone. There may be other attractive benefits (such as low interest rates, no annual fees and other incentives), the value of which could outweigh grace period savings.

February 1, 2001

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