Understanding How Grace Period Works
Grace Period Definition
A grace period as may apply to credit cards, loans and insurance contracts is the period between when your payment is actually due and the deadline you are given to make the payment without you being charged late fee. A grace period is actually an extension that is granted you after your payment has been due. If you are able to meet your obligation within the period of grace, such payment will not be counted as a late payment. Therefore, such payment will not result to any penalty such as late fees or the cancellation of the contract. Grace period is usually in the range of 24 hours to 30 days. However, this may vary depending on the lender or the nature of the contract. Let’s look at different examples on how grace period work.
Insurance Grace Period
There are different types of insurance such as car insurance, homeowners insurance, life insurance and health insurance just to mention but few. Each insurance type has its own grace period and this may be as regulated by each state. Insurance grace period can vary between 24 hours and 30 days. However, whatever the grace period that your insurance is giving you will be documented as part as the contract agreement. So, before you agree to any insurance policy, it is very important that you understand the period of grace you are being granted and how it applies vis a vis other terms and conditions of the insurance contract. There is this slang about insurance. They usually say that no premium no insurance coverage. What it means is that, if you fail to pay your insurance premium, there will not be any coverage. But if your insurance policy has expired and it is still within the grace period, the insurance contract will not be cancelled on the ground of late payment and you will still enjoy coverage.
So, if you are shopping around for cheap insurance premium, it is very vital that you don’t focus on the premium alone. You should endeavour to ask for the length of grace period you will be granted. Even though grace period may be governed by state or federal regulation, not all insurers give the same length of grace period. While some may just comply with the minimum grace period as may be required by law, some may extend their own. The advantage of grace period to policy holders is that, even though they have not paid their premium, they are assured of coverage as long as they are still within the period of grace. Except you set your insurance premium to auto pay, anything can happen which can make you fall behind in the payment of your insurance premium when due. For instance, failing to pay your insurance premium on time may not mean that you don’t have the money. It is possible that you forgot completely. The mail might even arrive late or you don’t check your mail on time. At times, it may be that the money you are expecting is delayed.
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After the period of grace has expired, your insurer may cancel your insurance policy. If your insurance policy is cancelled on the ground of non-payment of your premium, you may find it difficult to get another insurance company that will be ready to take up the insurance. On the other hand, you may not be able to get cheap insurance. If you still want to maintain the same insurance company, you may need to re-apply. This might mean applying new terms and conditions. Secondly, you may suffer financial loss as a result of having no coverage if anything should happen. Therefore, if you know that you still can’t pay before your grace period expires, you may be proactive enough by contacting your insurance agent on time and explain the situation to him. You can even opt to make payment in instalments. By this, you will still be able to keep your policy without having it cancelled. If you default in the payment of your insurance premium, your insurer may not necessarily report you to the credit bureaus. At best, your insurance policy will be cancelled. However, you may still need to pay for the period that you enjoyed coverage during the grace period.
Loans Grace Period
The period of grace for loans varies among different types of loans. But for mortgage loans, the standard is that your payment due date is the first day of the month. But the payment will only be considered past due after 15 days. Since loan repayment is a monthly affair, it is actually better if you can set payment alert or reminder in order not to even allow your payment to slip into the grace period. Prompt payment of your mortgage is a good habit you need to cultivate. If you miss your payment even for once, it will not only result to charging you late fees, the late payment will also be reported to the credit bureaus. Late payment can stay in your credit report up to seven years and this will affect your credit score negatively. History of late payment on your credit report will also result to higher interest rates on future loans.
Read Also:Effects of Rising Mortgage Interest Rates
Credit Card Grace Period
Grace period for credit card is usually a period between the end of your billing cycle and the next payment due date. If you are able to pay off your full balance within this grace period, you will not be charged interest on purchases. Under the Credit Card Accountability, Responsibility and Disclosure, or Credit CARD, Act of 2009, all credit card companies are required to provide a grace period of at least 21 days for cardholders to repay the charges against their credit card for the purchases made in a given month without incurring any interest charges on such purchases. However, there are exceptions to this grace period. It does not apply to balance transfer or cash advance. Also, period of grace will only apply if you don’t carry balance on the card and you are able to pay off the full credit balance within a given billing cycle. If you carry balance on your card or you are only able to make part payment on your card balance at the payment due date, interest charge will be applied retroactively. For instance, if you used your card to make a purchase of $500 within a billing cycle, the $500 will appear as your card balance at the end of your billing cycle provided you didn’t have a running balance on the card at the beginning of the month. You will then have to pay this $500 within the 21 days after the billing cycle. If you are able to make the payment in full, you will not be charged any interest at all. But if you only make a part payment of the amount, the card issuer may compound interest retroactively on the purchase or unpaid balance starting from the date the purchase was made. You may need to find out how your card issuer calculate their interest. They are under obligation to disclose how they calculate interest on card balance. But unfortunately, many consumers to bother to read the terms and conditions guiding their credit cards before they sign. It is good that you understand the fine print.
Read Also: How to Avoid Paying Interest on your Credit Cards
For 0% APR transfer credit card, period of grace can be as long as six months. During this period, you will not be charged interest on the transferred amount. But you will be expected that you pay off the total card balance within the intro 0% interest grace period. If you are unable to pay off the amount, the interest rate that will be applied will be very high. Also, you will be charged interest on new purchases during the intro 0% interest grace period. If you need clarification about how the grace period applies to you, it is better you contact your card issuer.