Shoppers watch wallets with credit card grace periods

While most people shop wisely for credit card interest rates, three out of four do not understand credit card grace periods. Yet shopping by grace periods can save you money.

A grace period is the number of days you have before a company starts charging interest on your new purchases (usually 20 to 25 days). This finance charge “free ride” is not the same on all credit cards.

Most cards charge interest on new purchases immediately unless the balance was paid in full the previous month. Some cards offer full grace periods. Others offer no grace period at all.

Determine which is right for you.

A typical grace period card uses the average daily balance including new purchases as the balance calculation method. You pay interest on new purchases immediately unless you paid in full the previous month.

A full grace period card uses the average daily balance excluding new purchases as the balance calculation method. New purchases are not included in determining interest for the current month. Unlike a typical grace period, you get the benefit of the grace period whether or not your previous month balance was paid in full.

A no grace period card uses the average daily balance including new purchases as the balance calculation method. With this card you will always pay interest immediately on new purchases whether or not you paid in full the previous month and there is no way to avoid paying interest.

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. It’s like getting an interest-free loan each month. You wouldn’t want a card with no grace period because you would be paying interest on all purchases immediately. There may be other attractive benefits, such as low interest rates, no annual fees or other incentives, the value of which outweighs grace period savings.

If you sometimes pay your bill in full but sometimes don’t, you benefit from a typical grace period only during months with no unpaid balance. You 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. But you will never benefit from a card with no grace period.

If you never pay your bill in full, you will never benefit from a typical or no grace period card because you always pay interest on new purchases. You will benefit most from a full grace period card.

The average consumer has nine credit cards, including retail, gasoline and charge cards. Many don’t know what kind of grace period they have on each. To find out, look for key words on the back of your statement where the balance calculation method is described.

Typical or no grace period cards will say “average daily balance, including new purchases.” No grace period cards will indicate that finance charges accrue from the date of each transaction. Full grace period cards will say “average daily balance, excluding new purchases.”

The trick is to determine 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 there is 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 the cardholder agreement. Law requires that the computation method be described in this agreement. If you don’t pay attention to grace periods, you are probably paying more in finance charges than necessary.

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