One of the most dreadful activities each month, for many of us, is to open that credit card bill. Whether it came in the mail or as a PDF file at the other end of an e-mail notification, the effect is the same. We then tend to just skim through it and focus on the meat and potatoes, the amount due. But by reading and understanding just a little more about things like our credit card billing cycle or our grace period, we can essentially give ourselves free 2 month loans on all our major purchases, all the time. Granted, we should never buy things we don’t immediately have the funds for, but an unexpected family emergency can quickly lead to a really expensive last minute plane ticket, hotel room, rental car, the works. Why? Because when it rains, it typically pours. That can easily force someone to tap into their emergency savings, and, even though that’s what the fund was created for, doing that always hurts.
This is where knowing your credit card(s) comes into play, and I will show you how to effectively distribute your spending and make the impact less noticeable, and financially taxing.
The Credit Card Billing Cycle
Smartly using our credit card billing cycle can be one of the most powerful weapons in our financial arsenal. But the truth is, it takes a little bit of research to fully understand it. The fact that financial advisers and even blogs like this one, always preach to pay your credit card off every month is not making this process any easier, because that statement is misleading. In order to avoid interest, all you need to pay off each month is the statement balance, not the full amount. There is a big difference.
When you apply for a new credit card and get approved, the account’s first billing cycle starts that very day (which also means your timeline for that sign up bonus begins that day, not when you activate the card). For example, credit card A was opened on 2 March, that means the first billing cycle ends on 1 April (not an April fools joke!). Then, on 2 April, the second billing cycle begins and so on. Any transaction that posted to the account by the first of every month, in this case at least, will be part of that cycle’s bill. This usually does not include pending charges, but since we never know exactly how long a charge is in pending status, it’s impossible to guarantee that a charge won’t clear before the end of the business day on the 1st and becomes part of the bill.
Knowing your credit card billing cycle is crucial to understanding when to make those major, often unexpected, purchases. In some cases, it may even be beneficial to put that charge onto a card that will earn fewer points but isn’t, for instance, 27 days into its billing cycle, as that charge will likely clear before the cycle ends and becomes due very much sooner than if put onto a card that’s 3 days into its cycle. Because, if you always pay the full balance due, you will then, starting the day after your billing cycle ends, fall into what is called a grace period.
A grace period is the time between the end of your billing cycle and the payment due date, and is usually somewhere between 23 and 26 days in length. That means that the payment for credit card A, whose billing cycle ended on the first of the month, does not become due until somewhere around the 24th or 25th of the month. This enables you to give yourself, essentially, an almost 2 month interest free loan for that $900 last minute airline ticket, if you complete the transaction near the beginning of the month that is, rather than at the end.
To have a selection of credit cards, however small or large, helps of course with this entire process, because it enables you to always use the card with the youngest current billing cycle for these types of transactions. For non emergency, but high dollar, purchases, knowing and understanding your credit card billing cycle and the grace period permits you to plan and time the transaction to where you feel confident you’ll have the funds available or are more comfortable spending that amount of money.
Being equipped with these 2 powerful tools opens up a world of financial possibilities and also drastically enhances your level of self-reliance. Even if, after 6 weeks or so later, that sudden $900 charge is still too much to bear all at once, the amount you will now have to take from your emergency fund will probably be significantly less than it would’ve been before, and could even prevent the need for an Army Emergency Relief (AER) loan or something similar.
Have any success stories of managing your billing cycle and grace period? Please share below or on social media with us. Also, please share this article if you found it useful.
Images in this article are courtesy of freeimages.com