The Dark Secret of The Credit Card Grace Period - How They Really Work

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Last updated on September 4, 2019 Comments: 2

Most Canadians are familiar with grace periods on credit cards. Unfortunately, not many know the shady little trick we’re about to reveal to you.

Definition of a credit card grace period

The grace period is a period of time where you will not be charged interest on your credit card balance, if you pay the balance off in full by the payment due date. The grace period starts on the last day of your monthly billing period. Every Canadian credit card offers a minimum grace period of at least 21 days from the close of your billing period. It ends when the payment date is due.

How does a grace period work?

Most people assume that if they don’t pay their balance in full, they will only start to be charged interest after the payment due date… wrong! Others assume that if you make a partial payment of your balance by the payment due date, they will only be charged on the unpaid portion of the balance, from the time of their purchase… wrong again! In fact, if you don’t pay off your balance in full by the payment due date, you will be charged interest all the way back to the purchase transaction date for the entire balance – even if you make a partial payment! Let’s use an example:

  • You buy a sofa for $1,2oo on February 21 with your rewards credit card
  • The billing cycle ends on March 16th, and the payment due date is April 6th.
  • You pay $1,000 April 1st and then the balance of $200 on April 10th.

You’re thinking, fantastic, I’m only going to be charged interest on the $200 for the 4 days in which you carried a balance past the payment due date. Guess what? You’re in for a nasty surprise. Because you did not pay off you’re balance in full, you’re actually going to be charged interest on the full $1,200 for the 52 days from your date of purchase to the payment due date. Then, in addition to that, you’ll be charged interest for an additional 4 days on the $200 you paid off between the payment due date and the date you paid off your balance in full.

Can the banks really do that?

Unfortunately, you kind of agreed to it when you applied for  the credit card and the banks wrote this “21 day grace if payment received in full.” If the payment is not received in full, there is no grace period and you’re charged interest on the entire value of your transaction from the moment you make your purchase.

That’s not to say the language used by the banks in cardholder agreements is entirely clear. In fact, Canadian banks didn’t always charge interest on credit cards this way. Some used to only charge interest on the unpaid portion of your balance from the time of your purchase, if you made a partial payment on the due date. Unfortunately, how the banks apply interest to purchases is fairly ambiguous. We took it upon ourselves to read the disclosure statements from each of the Big 5 banks, and we still couldn’t tell which of the interest application methodologies above were being used. In fact, given the ambiguity of the language, either one could be used.

We even called each call center to ask how interest was charged and only 3 out of 5 of the customer service reps from the Big 5 banks got it right themselves! The only time Banks are explicit on when it will apply interest charges is on cash transactions where banks clearly write “there is no interest-free period for Cash Advances, Balance Transfers, or Convenience Cheques.

The Grace Period Lesson

The only way to avoid interest charges on your credit card is to pay your balance in full by your payment due date. Our golden rule has always been to set-up pre-authorized payments from your checking account for the entire balance of your credit card statement on the payment due date.  You’ll never be late again. That’s the best bank beating strategy out there.

Author Bio

GreedyRates is Canada’s go-to resource for all things personal finance. Our expert articles and videos cover every topic under the financial sun, including credit cards, credit scores, loans, bank accounts, budgeting, investing, RSPs, TFSAs, GICs, taxes, and more. Want our advice on a personal finance issue? Send us an email at [email protected] and we’ll gladly give you some free tips.

Article comments

Jim Willis says:

Try paying your credit card the day it is due – payment doesn’t get posted until the next day. They get to charge you interest for not paying on the due date. Then all the above applies with interest back to purchase date. The funds are taken from your bank account immediately. I could see this happening before the age of instant payment. If you do an interac email money transfer within minutes payment sent and received.

The GreedyRates Team says:

Hey Jim,

It usually takes a day or two for payments to clear, even inter-bank payments, so this is something that you should account for when the next balance comes due. It’s true that in the age of digital money transfers and the electronic acceleration of, well, everything, that you should be able to expect faster service. However, remember that in any single second a bank is handling thousands of payments from people like yourself, and it takes some time to organize and account for it all.

Have you ever sent a payment to someone at another bank, or to someone in another country? You’ll notice that despite your texts being sent instantly to anyone in the world, a payment that crosses these invisible borders might take up to two or three times longer. It’s the same idea. In the future, we recommend paying your bills before the day that they’re due to avoid this problem, because even if you technically “paid” by sending the money, if the bank doesn’t receive it until the next month, it’s on you. Hope that makes sense!

GreedyRates Staff