Understanding Credit Card Billing Cycle and Grace Period

Credit cards allow people to pay for their purchases when they are short of money and repay to the credit card company within a stipulated time period without having to pay any interest on the credit taken. Different credit card companies charge different interest rates to their customers in case of delay in repaying (i.e. beyond the stipulated time period).

Suppose, John goes to ABC Ltd., a credit card company, to purchase a credit card, the credit card company intimates the customer about his credit card billing cycle, minimum repayment, grace period and interest rate. Let us look at all these basic terms related to credit cards.

What is a credit card billing cycle?

For example, let’s say that ABC Ltd., specifies that John’s billing cycle is 5th of a month to the 4th of the next month. This means that whatever John purchases using his credit card from 5th of current month to 4th of the next month is considered as a single bill and a statement will be sent to him on 5th of next month specifying the amount repayable to ABC Ltd.

What is a grace period?

Credit card companies allow their customers to make interest free use of credit for a period over and above the billing cycle and this is called the grace period. This extended period may vary from company to company. So, if ABC Ltd. tells John that he has a grace period of 25 days to repay the credit taken, it means that John actually has 30+25=55 days time to repay all the credit taken by using the credit card for his purchases (i.e. till 30th of the next month) and that too without having to pay anything extra in the form of interest.

Hence, if John makes a purchase on 6th March he has a credit period of 44 days before he has to repay to ABC Ltd., and if he makes a purchase on 4th April he is left with a credit period of only 25 days.

How is interest charged?

Taking the example further, let’s assume that John had \$500 to be repaid to ABC Ltd., by 30th April for his first billing cycle that was from 5th March to 4th April, and he has not repaid anything as on 30th April, and the interest rate charged by ABC Ltd., is 20%p.a. (which again varies from company to company). Also, remember that John’s 2nd billing cycle has already begun on 5th April.

So, for every new purchase made during the 2nd billing cycle, John will have to pay interest from the date of purchase till the date of repayment and for the outstanding amount he will have to pay interest @ 20% p.a. for every day of delay+ late payment fines+ any other penalty charged by ABC Ltd.
 How credit card billing cycle works with example

What is minimum payment?

This is the least amount of money that John will have to repay to ABC Ltd., so that he is not charged late payment fine. But one must note that interest and any other penalty will still be charged on the outstanding amount until John repays it fully.

Can I avail grace days during my next billing cycle even if am defaulting on my previous billing cycle repayment?

So, once you have read the above points you would have realised that in case of a default in repayment, I have not mentioned about any grace days in the 2nd billing cycle. It means that once John has defaulted in his repayments he will not only have to pay interest + late payment fines on the outstanding amount for every day’s delay and pay interest for every new purchase in the next billing cycle, but he will also have to forgo the grace period henceforth until he pays off all that he owes the credit card company. Moreover some credit card companies allow for grace periods only after they are convinced that the customer’s repayment habits are on track. So, this will lead to a loss of grace period for few more months.

Credit cards can be a boon as long as you stay firm on you repayment commitments and can turn into havoc if you get complacent.