What Is A Grace Period?

Find out what a grace period is, how it works, how long it lasts, and how it can be helpful to you!

You've probably saw the word "grace period" in credit card statements, loan agreements, or utility bills, but do you know what it actually is?

It’s a valuable feature that offers flexibility when it comes to paying something. Let's learn more about it, so you can make the most of it.

What Is a Grace Period?

It refers to a set timeframe during which a borrower can make a payment after its due date without incurring penalties, such as late fees or additional interest charges. Grace periods are common in credit card agreements, mortgages, student loans, and utility bills. The purpose of a grace period is to provide borrowers with extra time to meet their financial obligations without immediate consequences. The period varies based on the type of loan and the lender.

How Does a Grace Period Work?

Here's how it typically works for different types of financial agreements:

• Revolving Credit: for credit cards and other revolving accounts, the grace period refers to the interval between the end of a billing cycle and the payment deadline for that cycle.
• Non-Educational Installment Loans: in the case of mortgages, car loans, and similar debts, the grace period often extends a specific number of business days beyond the due date. For instance, mortgage payments typically allow a grace period of up to 15 days past the original deadline.
• Student Loans: for student loans, the grace period begins after completing a full-time educational program and lasts until regular payments are required to start. Federal student loans, for example, commonly offer a six-month grace period.

Does It Affect Your Credit Score?

Payments made within the grace period are considered on time by lenders and are not reported to credit bureaus as late payments. However, missing the grace period deadline can have serious consequences, including:

• Late Fees: additional costs can quickly accumulate if payments are not made.
• Negative Credit Reporting: if a payment is not made before the grace period ends, it'll likely be reported to the credit bureaus, lowering your credit score.
• Interest Charges: carrying a balance beyond the grace period often leads to accruing interest at high rates, especially on credit cards.

Tips to Avoid Negative Impact

• Set Up Alerts: use mobile apps or account notifications to remind you of upcoming due dates.
• Automate Payments: enroll in autopay to ensure timely payments.
• Check Your Statements Regularly: stay informed about your payment cycles and due dates.
• Pay More Than the Minimum: this helps ensure you don’t carry a balance and lose your grace period benefits.

Grace Period vs. Deferment

Although grace periods and deferments both offer temporary payment relief, they are not the same:

• Grace Period: this is a short-term benefit offered by the lender, usually lasting a few weeks. It is automatically applied and doesn’t require borrowers to submit an application.
• Deferment: deferment allows for a more extended pause in loan payments, which can last several months or even years. It typically requires an application and is granted under specific conditions, such as financial hardship, active military duty, or participation in an income-driven repayment plan. However, deferments may result in additional interest charges and could prolong the overall time needed to repay the loan.

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