I am wondering why most credit card issuers offer a grace period after the statement date, provided they're not obliged to? Is it required by law (I'm 99.99% sure it's not but just in case)? Does having a grace period bring some benefit to the issuer (like more people will be willing to get the card, and later almost certainly one will forget to pay off the debt)?

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    @TylerH I mean the first case, the ability to use credit costs with no interest fees provided you return them back within agreed ammount of time (which is grace period). Didn't meant introductory grace period – seeker Oct 15 at 18:15
up vote 58 down vote accepted

The grace period exists simply to get more customers. The bank makes money from merchant fees every time you swipe the credit card, and the amount they make is more then it costs them to float that money for about a month. Without the grace period there would be much less of an incentive for many people to use the card.

It's true that even those that usually pay off the card in full will occasionally forget and pay some interest, but that doesn't have to be the driving force behind it. Even if no customers ever paid a dime of interest, the CC bank would still make a profit from usage (albeit less profit). So the goal is to get as many customers as possible, and when some end up paying interest, it's an incredible bonus.

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    Most merchant accounts have a minimum of $0.25 a swipe (at least in the US), which is why some stores (usually independently owned stores) request a five dollar minimum on a card. They make plenty of money whenever you use a card as a convenience card rather than paying major purchases (but there's also a +%,so it's still not a loss) – phyrfox Oct 15 at 5:05
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    > will occasionally forget ... And that's why mine are set to auto debit on my bank account – Antzi Oct 15 at 7:03
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    @Nelson: Vendors can't charge more for credit card purchases, but they can and do offer a "cash" discount. – AbraCadaver Oct 15 at 17:12
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    @Nelson - actually, quite a few of my regular bills tack on an extra charge if I pay with a CC instead of writing a check or paying via ACH from a bank account. – TTT Oct 15 at 17:45
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    @user73687 Here's what visa themselves say but its actually different than what I had heard. I'd always been told it was part of Visa's merchant rules that you couldn't surcharge, but Visa is saying its actually a legal thing (depending on where you are). I may have been misinformed, so sorry if I mislead you. – mbrig Oct 15 at 21:40

Credit cards developed out of charge cards, which require you to pay off the balance each month and don't have interest payments. Credit cards simply built off that model, so it was natural to keep the grace period. Once that became the norm, credit cards companies didn't want to be the only one not giving a grace period.

Credit cards are a mix of charge cards and lines of credit. Having a grace period means that people who want to use them as charge cards can do so. Without a grace period, people who want a charge would have to explicitly get a charge card.

The rise of debit cards means that not only do credit cards have to compete against charge cards, but they also have to compete against debit cards. As it stands, credit cards a highly attractive choice compared to debit cards: they offer rewards, they have better liability policies, you don't have the money automatically taken from your account, and you can defer payments at the cost of interest if you want. Getting rid of the grace period would make credit cards much less attractive.

Credit cards customers can be categorized into two broad groups: those that use the cards as charge cards, and those who use it as a line of credit. Those in the first group have the money to pay for the stuff right now, but find it more convenient for all the bills to be bundled into one monthly bill. Those in the second group can't afford to pay off the balance. For the first group, if there were interest being charged, they would want to pay off the balance as soon as the charge gets posted, which eliminates the convenience of the credit card. For the second group, they can't pay off the bill in full anyway, so not having a grace period doesn't impact their behavior as much.

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    While I agree with most of what you say, is there any charge card left besides Amex, what percentage of people still use it anymore? (I had an Amex credit card a few years ago...) – RonJohn Oct 14 at 21:41
  • @RonJohn: I think that depends heavily on location. For example, all cards on the Danish market I know of are either (a) debit cards, (b) cards that behave like "credit" at the POS but draw the money from a current account as soon as each transaction posts, or (c) cards whose balance must be paid off in full montly, generally resulting in 15-45 days credit depending on when in the month you used it. If you want revolving debt, you'd have to negotiate a line-of-credit on the current account the payments are made from. – Henning Makholm Oct 15 at 0:51
  • @RonJohn I suspect that if credit cards somehow stopped having a grace period, charge cards would be created to take their place. – stannius Oct 15 at 16:51
  • Before reading this post never have I ever heard of charge cards. Even when I signed up for my first CC about a decade and a half ago, not once did I know about the option of a charge card. Did charge cards also provide a grace period or were you expected to magically know how big of a check to send in and hope that it gets to the bank on time? I think I have so many questions but after much Googling does it just boil down to modern CCs allowing you to carry a balance from month to month and incur crippling interest debt whereas charge cards stopped working until you paid? – MonkeyZeus Oct 15 at 19:43
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    @MonkeyZeus If you don't pay a charge card within the grace period, you'll be hit with significant fees, a negative credit record mark (you must pay in full to avoid a delinquent payment, instead of the minimum payment as with credit cards), and after a few times, your account will be closed and you will be banned by the bank forever (American Express is known for their permanent blacklist). The idea is that charge cards are issued only to those who are very good risks, minimizing the default rate, and therefore the issuing bank's cost of credit. – user71659 Oct 16 at 6:13

I am going to answer this is a US centric way. The US is a country that doesn't require a grace period, but most credit cards do offer a grace period.

There is a group of credit card users who never pay interest on their cards. They use the grace period to its fullest potential by paying the full amount of the statement balance by the exact due date. They use the card for everyday purchases and large purchases, even if there was a time that those purchases would have been done with cash or a check.

They would use it to buy a car, or pay their property tax or to be honest any tax as long as there was no fee to do so. They use all these transactions to earn miles, points or cash back. If interest rates on bank accounts were non-insignificant they would also calculate the extra interest they were earning by delaying payment of large purchases for the 30 day statement length plus the 25 day grace period.

Imagine a major credit card announced that the grace period would end on December 31st this year.

  • If they grandfathered all the account holders of record on December 31st they would see a big influx of new applications becasue they they wanted to beat the deadline. Those new card holders would be applying to make sure if this becomes the norm, they have one credit card they can use that has the grace period.
  • But if they announced that only current holders on the date of the announcement could keep the grace period, then new applications would decrease to near zero. Many potential customers would rate the card benefits as very poor. Some would still apply becasue the they weren't in the group of consumers that were described above. Of course current users would still use the card.
  • But if they announced that the 31st of December deadline ended the grace period for all accounts regardless of current status, the usage of the card would drop. People who had other cards with grace periods would shift to those other cards as their main card. Many/most would cancel the card if they thought the hit on their credit score would be survivable, or if there was a annual fee.

Now if this was the beginning of a new trend, then at some point most cards would also make the change. the question would be could the early adopters survive to that point. They would have to calculate that they could survive that bold business decision, and gamble that other card companies would also make the change. If other cards didn't make the change it might take years after the the grace period was restored before they gained back those customers.

Of course the credit card companies know the sources of their income: Fees, penalties, interest, transaction fee. They also know their expenses: normal business costs, defaults, fraud, and card benefits. they know how to model changes to card benefits.

In the last year or two many card companies have ended or scaled back some of their other benefits: automatic extended warranties, free rental car coverage, price protection, etc. I have not heard of a large number of consumers switching cards, becasue for most consumers these were benefits that were either used infrequently, or made up only a small portion of their used benefits.

the question is what benefit change will come next...


regarding the requirement for a grace period in the US according to to the Consumer Financial Protection Bureau a part of the US government:

A grace period is the period between the end of a billing cycle and the date your payment is due.

During this time, you may not be charged interest as long as you pay your balance in full by the due date. Credit card companies are not required to give a grace period. However, most credit cards provide a grace period on purchases.

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    The second sentence in this answer is incorrect: since the CARD Act of 2009, credit card companies in the US are required to provide a grace period after the statement date to pay off the balance due without incurring interest charges. I believe the minimum is 21 days after the statement is sent to the customer but most cards have 25 days grace periods. – Dilip Sarwate Oct 14 at 12:57
  • If a company is required to offer a 21-day grace period from the date a statement is mailed, but prints statements with a grace period 25 days after they are prepared, then the printed grace period will be legal if the statements are mailed within 4 days of printing. Although statements would normally be mailed on the same day as they are prepared, including the four days of leeway would avoid complications if e.g. statements are prepared on Friday but the envelope-stuffing equipment breaks down, Monday is a holiday, an the statements don't actually get mailed until Tuesday. – supercat Oct 14 at 17:30
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    @DilipSarwate: The 21 days mandated by the CARD Act is to avoid late fees, not interest charges. As far as I know, every credit card charges interest from the day of the transaction on at least a subset of transactions (typically cash advances have no grace period) which is prima facie proof that there is no law requiring a grace period. – Ben Voigt Oct 14 at 20:32
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    @DilipSarwate: That's a feature of your credit card agreement, not the law. – Ben Voigt Oct 15 at 1:16
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    @DilipSarwate: The CARD Act does not require credit cards to have a grace period. It does require that for cards that do, the grace period must extend by at least 21 days from the statement. It's in section 163 "Timing of Payments". – Ben Voigt Oct 15 at 1:24

in the US it is mandatory; however it all relates to the US Mail. The used-to-be-normal way these bills are paid.

At the statement close date, the credit card issuer gathers up the month's transactions (this doesn't take 0 time, though it's a lot faster than it used to be), prints a statement, and mails it to your house. 1-5 days later you get it.

Most people would let bills pile up for 10-15 days then sit down and handle them all in a batch, writing a bunch of checks. 1-5 days for the mail to carry them back (you knew the time; you knew Virgina was 1-2 days and California 4-5). That is why the grace period is ~20-25 days.

Auto-pay makes all that seem stupid. But on the other hand, if there wasn't a significant time lag between credit card charge and EFT debit, it would defeat the point of the credit card, it would just be a debit card and those are already a thing.

And by the way, I've logged annual membership payments for a nonprofit and we capture the check numbers, so I can see how many checks they write in a year. A lot of people, still, write hundreds of checks a year, so they are not using auto-pay.

If there wasn't a grace period, it would cause an annoying loop.

Otherwise in the 25 days, your $2000 balance would accumulate $10 of interest, and your "payment in full" would only settle the $2000, not the $10. So the next bill would be for $10, which accumulates 20 cents interest. The third bill would be for 20 cents, then the fourth bill for a penny. It would be bad for the credit card issuer also, because it would annoy the daylights out of customers, and mailing a credit card bill costs them $1-2. So the credit issuer has incentive to provide that grace period also, at least for bills that would leave small residual amounts.

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    "If there wasn't a grace period, you'd never be able to pay off your card." And yet people who have a balance, and thus don't have a grace period, do pay off their balance, as do people with other loans such as car loans and mortgages. They even sometimes pay them off before the term of the loan. – Acccumulation Oct 14 at 18:50
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    @accumulation edited. Better? In those other cases, those use different methods to give you a balance that works. Car loans and mortgages are not revolving credit, and are predictive of a known payment on a balance that's not being added to. Credit cards can't predict. – Harper Oct 14 at 21:23

Grace period is unavoidable, if you're supposed to have any chance of paying off your card. Imagine there is no grace period:

  • all the month long you don't know how much you'll eventually need to pay (because you're still making new payments)
  • the billing period is closed so now you can learn how much you're supposed to pay
  • boom - too late, you're overdue! And charged all the interests, fees and penalties.

You need at least few seconds of grace period to have a chance to make any payment - and that's with today's automatic electronic debits. Card without a grace period would always be very costly to use.

That was about the period itself, but why is it almost a month long? The period is typically about 20-25 days, because in the past it took many days for the billing period to be closed and the bill prepared, have it arrive via mail, you writing a cheque and mailing it back. So, it was safer to give clients a month instead of risking constant complaints "it wasn't me, it was the mail". Processing client complaints is very costly.

Today, with internet banking and wire transfers, 3-5 days would be a more reasonable grace period. But banks can't just shorten your period, because you'll feel deprived of something that (you feel) is rightfully yours and it could give you just enough incentive to switch banks. So it's basically a Mexican standoff between banks - whoever shots first, gets killed. They'd rather just keep rolling with "almost a month" than update it. They make more enough money elsewhere to pay the interest for your grace period.

All above assumes that the card has to be run in period-mode. It doesn't. Today's computers could automatically recalculate your card on a daily basis, so instead of billing-period + overlapping grace-period you would just have 30 (or 31) overlapping periods. But, customers already find it very hard to wrap their heads around just two periods and also as in paragraph above, it could be interpreted as "taking our grace periods away" so that's not going to happen.

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    This whole answer assumes that interest is a function of paying late, but it's not. It is 100% possible to have no grace period (interest begins accruing immediately), while still having 3 weeks between statement date and due date (in such cases, paying "on time" will result in interest charges but not late fees). The answer's also wrong for stating that competition is the reason grace periods are set at 3+ weeks. Competition is the reason for offering a grace period in the first place, but the CARD Act is the reason you never see short (e.g. 5 day) grace periods. – Ben Voigt Oct 16 at 0:37
  • @BenVoigt I don't understand how would it be possible to have 3 weeks between statement and due date without grace period, because AFAIK this is the grace period. CARD Act can be the reason in jurisdictions where it applies, but it doesn't apply everywhere, yet we see grace periods everywhere. – Agent_L Oct 16 at 8:15
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    There are two different types of charges. Due date controls late fees and penalties, avoided if the minimum payment is made. Grace period controls interest. On a transaction where no grace period applies, interest begins accruing immediately. Such transactions include cash advances and balance transfers on nearly all cards, and purchases on some. For other cards, a grace period exists on purchases only if the previous statement was "paid in full".not just a minimum payment. The time between statement date and date the minimum payment is due is not "grace period". – Ben Voigt Oct 16 at 13:53
  • @BenVoigt I think you meant "for other transactions", not "cards". For cards where I live (Poland), grace period is not tied to paying the balance in full. The unpaid balance keeps ticking, that's right, but the new balance is in it's own grace period. AFAIK even if you fail to make the minimum payment, you do get all the penalties, but new balances still retain their grace periods. I've just skipped the immediately due payments, because they bypass everything that makes CC unique, so I find them irrelevant to any periods. – Agent_L Oct 16 at 14:52
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    I did mean "cards". The terms on cards available to people who are rebuilding credit generally are pretty unfavorable -- high interest rates, no grace period, fees for talking to customer service. Premier cards have few fees and lots of benefits, and then most cards fall in between, having grace periods and basic cashback but few other benefits. Just because you and I avoid using cards with no grace period, and avoid cash advances, doesn't mean you can ignore these things in an answer read by visitors across the whole range of credit scores and account terms. – Ben Voigt Oct 16 at 15:54

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