A grace period is the time you have before a credit card company starts charging you interest on your new purchases -- usually a period of 20 to 25 days.

But this "free ride" on finance charges does not work the same way on all credit cards. In fact, on most credit cards, you will be charged interest on your new purchases immediately -- unless you have paid off your credit card in full the previous month.

A card with a typical grace period...

• Has an average daily balance including new purchases as the balance calculation method. This means you pay interest on all new purchases immediately, unless you have paid your previous month's bill in full.

A card with a full grace period...

• Has an average daily balance excluding new purchases as the balance calculation method. 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, whether or not you paid off your balance in full the previous month.

A card with no grace period...

• Has average daily balance including new purchases as the balance calculation method. However, with this card, you will always pay interest immediately on new purchases, whether or not you have paid your credit card bill in full the previous month.

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

• It doesn't matter whether you choose a typical or full grace period because you never pay interest. In essence, every month you get an interest-free loan.

If you sometimes pay your bill in full, but not always...

• 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 card only during those months when you have no unpaid balance.
• You will not 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 not benefit from either a typical or a no grace period card, because you will always pay interest on your new purchases.

* 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.

The average consumer has six credit cards, including retail, gasoline and charge cards. Unless you pay particularly close attention, you might not know what kind of grace period you have on each card. But there is a way to find out. Look for key words on the back of your credit card statement where it describes the balance calculation method:

• Typical grace periods or no grace periods will be listed as "average daily balance including new purchases." On no grace period cards, also look for a statement indicating that you will pay a finance charge from the date of each transaction.
• Full grace periods will be listed as "average daily balance excluding new purchases."
  

The key is to look at whether the average daily balance includes or excludes new purchases. If it includes new purchases, you lose the grace period when you carry a balance. If it excludes new purchases, you benefit from the grace period, whether or not you carry a balance.

If you can't tell what grace period you have by looking at your monthly statement, call your bank or card issuer and ask for a copy of the cardholder agreement. The law requires that the computation method be described in this agreement.

If you don't know the facts about grace periods, you are probably paying more in finance charges than is necessary. Here is a guide to the most common (and costly) "myths" about credit card grace periods.

Myth: The grace period is the amount of time you have to pay your credit card bill.
Fact: The grace period has nothing to do with the amount of time you have to pay your bill; it is the number of days you have before a credit card company starts charging you interest on your new purchases.

Myth: All purchases are interest-free for at least 25 days, regardless of your previous balance.
Fact: If you have a typical grace period card, you start paying interest on new purchases immediately when you carry over as little as a penny from the previous month's balance. If you have a no grace period card, you always pay interest on new purchases from the day you make the purchase.

Myth: If you make a purchase and then pay for it in the same month, no interest charges are imposed.
Fact: You will pay finance charges on the new purchases if you are carrying forward any unpaid balance from the previous month, unless your credit card features a full grace period. You will also pay finance charges on a no grace period card.

Compiled by American Express, in cooperation with the National Institute for Consumer Education.