10 Myths About Credit: Myth #8 (Grace Period)

Myth #8: You get interest free grace period of 21 numbers of days on all purchases made on your credit card.

Reality: People that benefit from the interest free grace period which is normally 21 days for most credit cards are those who pay off their credit cards in full each time. If you have an outstanding balance on your credit card after your grace period ends and you make a new purchase on your card (adding on to your existing balance), that new purchase will accrue interest from day 1 (in addition to your existing balance) there is no grace period.

Credit cards are a good way to get the most out of rewards, cash backs and even buy some time if your finances ever get tight. However, if you want to avoid paying interest on any of the purchases on your credit card, make sure you pay off your credit card balance by the end of your grace period, which is normally 21 days after your bill statement comes out (although some credit card companies may offer less or more days, you will need to check your credit card holder agreement).

What if you are in a really tight money crunch and you can’t afford to make your payments in full on your credit card at the end of your grace period?

Ideally you would like to strive to have no consumer debt at all each month, but things happen. If you find yourself in a financial jam and can’t pay off the entire balance, you can try to minimize the cost of borrowing until you can pay off the balance in full.

One way to do this is as you approach the end of your grace period on your credit card, use your unsecured line of credit or HELOC which should normally have a lower interest rate than your credit card to pay off the balance of your credit debt as this has the higher interest rate.

Why not pay off the credit card with your unsecured line of credit or HELOC right away since it has the lower interest rate to begin with?

Unlike credit cards, HELOCs and unsecured lines of credit have no grace period, which means interest starts to accrue from day 1. Yes, the interest rate is lower, but with the approach mentioned above, you get the best of both worlds while minimizing the cost of borrowing. It will buy you some time and lower your cost of borrowing, but this approach is not desirable long term.

Solution: For those of you that read my blog regularly, you know I hate debt, especially consumer debt. Trying to play around with your debt balances by moving them from one credit product to another will eventually lead to… well more debt. But I think it is better to be informed about all options and I have used this approach a time or two when I was still carrying debt and it’s helped to minimize my cost of borrowing.

Strive to pay off your credit card balance in full, but if you can’t don’t rush to pay it off with lower interest rate credit products like a HELOC.

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8 replies

  1. So, then when is HELOC ever ‘useful’? I ask because I have had one for over 10 years and haven’t used it. Is there any real gain/value in just having (i.e says what about you in terms of money management if you ever went to your bank for a big loan etc)? . I really enjoy reading your posts and those of those who comment. Thanks in advance!

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  2. So, then when is HELOC ever ‘useful’? I ask because I have had one for over 10 years and haven’t used it. Is there any real gain/value in just having (i.e says what about you in terms of money management if you ever went to your bank for a big loan etc)? . I really enjoy reading your posts and those of those who comment. Thanks in advance!

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    • I want to start by saying that this is my own personal opinion and my own experience learning about personal finance & empowering others to do the same.

      A HELOC is useful when:

      a) you use the funds to improve the long term value of your home (not to be used as an ATM to fund vacations, clothes and other discretionary spending or pay off a car etc- pulling money out of an appreciating asset like a home, to pay off a depreciating asset like a vehicle makes no sense to me, but people do it all the time and get into debt doing it.

      2) You get laid off, get extremely ill and are not able to work etc. Technically an emergency fund is suppose to cover 6 months of living expenses, so in the event of a lay off, you should be using your savings, but 6 months is a lot of money and for many, and some don’t just want to have that much money dormant & not invested in the stock market (I get it). A HELOC can help cushion the financial fall that comes from loss of work or an illness in the family. Even if you have an emergency fund, if the money runs out, its better to pull from a line of credit than a credit card to fun the shortfall. Its not ideal, but life happens.

      One thing to remember is that a HELOC is a credit product that you have to apply for like anything else. Even if you have a mortgage, it is a separate product. When you apply for a HELOC, the banks requires a credit check and proof of income. Many people shoot themselves in the foot by applying for a HELOC when they are unemployed/ laid off in order to access equity from their home. The bank needs proof of income to qualify you so this is the worst thing to do.

      I would recommend to just keep your HELOC, don’t use it for anything other than these 2 things and continue on, you are doing great!!

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  3. Great advice! You have a smart group of readers. I need to stick around for a while. 🙂

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  4. This is a good tip. I’ve never used HELOC. When I was in debt before, I usually just used the card with the lowest APR or called the credit card companies and asked them if they had ongoing promotions, which luckily were 0% for a number of months. I was able to get the promotions and payoff my cards faster because I didn’t have to pay for interest. But of course, I had to pay interest on transactions I made before the promotions started.

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  5. Excellent advice. Many people do not realize that HELOC interest starts from day one!

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