Use That Grace Period
One of the benefits of completely paying off your credit card every month is that you can take advantage of your credit card’s “grace period.” The grace period is typically a 20 to 25 day period after your statement closes that the credit card does not levy any finance charges. Most credit cards typically require that you not carry a balance from the month before to be eligible for the grace period. If no grace period is in effect, finance charges begin accruing the same day you make a purchase.
At CreditShack.org, we believe that credit cards can be used as a tool to save (or even earn) you money. Let’s examine the finances of our two imaginary friends — Alice and Bill — to see how a grace period can be used to put money in your pocket.
Alice believes credit cards are evil. She just finished paying off thousands of dollars in charges and interest she racked up during college, and doesn’t want to ever see another piece of plastic in her life. Alice pays cash, writes a check, or uses her debit card for all of her purchases. As a result, she lives within her means and never pays any interest. Because she never pays any interest, her $3,000 monthly expenditures end up costing her exactly $3,000.
Like Alice, Bill does not like paying any interest, not even a penny. Unlike Alice, Bill charges everything to his credit cards. Thankfully Bill is financially responsible and pays his card off in full every month. Because Bill has excellent credit, he easily qualified for his American Express Blue Cash card, which gives him as much as 2% rebate on all his purchases. Although Bill charges everything to her credit card, he has never paid a penny of interest in his life because he takes advantage of his credit card’s grace period. While he makes purchases on his credit card, he keeps his money stored in his ING Direct Orange Savings account earning 2.35% APY until it’s time to pay the credit card bill. Over the course of the month, his $3,000 socked away in his ING Direct Orange Savings account earned him almost $6 in interest. Furthermore, because Bill qualified for a good cash back card, he earned a $60 rebate from his credit card.
So where do our two imaginary friends stand? Alice came out even by paying $3,000 for $3,000 worth of stuff. But Bill fared better, paying only $2,945 for $3,000 worth of stuff.
Neither Alice nor Bill pay any interest. But because Bill charges his purchases to his credit card instead of paying directly, he saves $65 every month, or $780 every year.
Wouldn’t $780 be a nice Christmas bonus? (If you spend more than $3,000 a month, your bonus will be even bigger!)
The moral of the story is this: if you have the willpower to pay off your credit card every month, get a rewards credit card, an ING Direct savings account, and take advantage of that grace period!
