Manage Your Credit Card Cycle: Grace Period, Closing Date, Due Date and Compound Interest

One of the best kept secrets of having a credit card is the grace period. The grace period is the number of days between the closing date and the payment due date. During that time you can make purchases interest free. The number of these days can vary from one credit card to another. Be clueless about the grace period and you can lose dollars in a hurry. FYI: Rich people get richer using someone else's money.

How to Use the Grace Period to Your Advantage

Get your bill and locate your closing date. If for some reason you can't find it on your paper bill or online screen, phone the customer service department and ask. You must know your closing (or cut off) date in your billing cycle.

Next, and equally important, you must know your due date. It is often not the same date as your closing date. For example, my Discover card has a closing date of the 6th of each month. My due date, or when they expect to be paid, is 10 days prior to my closing date. That means I must get payment to them on the 26th of the previous month or the 27th if the previous month has 31 days. That information can be noted on your calendar and over time save you oodles of dollars.

If keeping up with such information for multiple credit cards is problematic for you, then keep a chart. Write down each credit card you have, the closing date, the due date and put it where you can readily refer to it.

For simplicity in payment I prefer to have my bank account debited. Discover was the first (and may still be the only) card that will debit my bank account so that my only concern is having sufficient funds on the date they debit. When my life is busy or I'm in a family crisis I simply check my flow of funds and make sure that by the 26th of the month there will be adequate funds for my Discover debit. How do I write that figure down way ahead of time?

The Importance of Your Closing Date

I use my closing date. As soon as my account has closed out for the month, that would be the 7th for me, I check it online. Immediately I know what my payment will be on the 26th or 27th of the same month. For example, my Discover closes on the 6th of each month. On the 7th I check my Discover account to see what I've spent. Then I write it down in my checkbook ledger with the date of debit. Should I need to transfer funds to cover the impending debit I have plenty of time to make arrangements. In other words I'm not in for any nasty surprises like late fees or hidden charges.

Tip: If you're a newbie to credit card management or you want to use credit at no charge, change your credit limit to a safe amount. Yes, you can go down from the credit limit extended by your card issuer.

When I started out my credit card limit was $500. I didn't get into trouble with that amount. Now that my credit limit is sky high I wouldn't dream of spending that much because I want to use credit cards for my convenience. FYI: Credit cards are not a bank.

Sneaky Credit Card Tactic #1

Mostly I've learned to be credit savy by experience. Like you, I started out with little credit and no knowledge of managing one card let alone more than that. Here is one of the sneakiest tactics I've encountered: You don't get a grace period when you don't pay your balance in full.

Learning the Expensive Way

My first card was a Mastercard. I planned to put a few small purchases on it, pay my balance in full by the due date and build a timely payment history. In other words I was going to pay just like I was handling cash, the difference being I was using the convenience of a credit card.

A few months later I only paid a partial payment on my balance. I thought I was okay if I paid almost the whole payment but not every single penny. I thought I would catch up the next month.

When I received the next month's bill it showed excessive interest charges when I'd gotten accustomed to no interest charges. Whoops! I lost hard earned money because I hadn't read all that fine print that describes the credit card's rules. FYI: The words "new balance" means the total owing if you want to avoid any interest.

Quick Way to Know the Fine Print Rules

If you don't know the rules and practices of your credit card lender you will be charged big bucks for the use of their card. But what if you're insanely busy? Solution: customer service. Put the 800 number of your credit card in your phone. The next time you're stuck waiting on somebody call up customer service and ask all the questions you don't have time to read about in the fine print. You can also ask customer service to change dates according to when you get paid. I've changed my closing date (which affects my due date) 4 times over the life of having my Discover card. Write down the key dates to put in your aforementioned chart.

Sneaky Tactic #2: Compounding Interest is Very Expensive

The sneakiest part about the time I didn't pay my Mastercard new balance was the credit card had the right to charge me interest from the date of every subsequent purchase. So when I bought gas, cha-ching, interest accrued. When I bought a birthday card two days later, cha-ching, more interest compounded. Compounding is a nasty word when it's money you owe someone else. Compounding is how credit cards become mega empires. Compounding interest is your evil enemy when you owe it to your credit card. An easy to understand description of compounding (which mystifies many adults) is the following link. http://frugaldad.com/2008/04/11/how-to-teach-compounding-interest-to-kids/

I made up a little rhyme to help you remember about compound interest:

Saved $ & compound interest = Bucks

Owed $ & compound interest = Sucks

My next finance article will address purchasing big ticket items such as furniture, appliances, cars etc.