What Is a Grace Period?

Grace Period Explained

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A grace period is the set amount of time you have to meet a financial obligation like a credit card or mortgage payment after its deadline, with little or no penalty. Grace periods vary in length and will depend on the creditor or lender, as well as the type of debt. 

Learn how a grace period works and how it will impact you, depending on the type of debt you owe.

Definition and Example of a Grace Period

The time period after a deadline or due date of a loan where you won’t face any consequences if you make a late payment is called a grace period. You can think of a grace period like a timeout in sports or a summer vacation in grade school: It’s a chance for you to prepare for your obligations to come, but you have to do that before the time is out.

Let’s say you just graduated college, and throughout your four years at university, you took out federal student loans. For most federal student loan options, after you graduate, there is a six-month grace period before you have to start making payments. Within this time frame, you organize your finances, find a way to make a steady income, and choose a repayment plan.

How a Grace Period Works

A grace period is the set amount of time you have to meet a financial obligation. With credit cards, for example, a grace period is the time between the end of a billing cycle and the date your payment is due. If during the grace period the financial debt you owe is paid for, penalties such as late fees and impacts to your credit report will be revoked.

Loans with grace periods may impose other penalties in addition to late fees. Your interest rate may increase, the lender might seize your collateral (if you have a secured loan like a mortgage or car loan), or your credit score can take a hit. 

Since many lenders can report late payments to credit bureaus 30 days (or sometimes up to 60 days) after they’re due, it’s a good idea to make your payments before the 30-day mark. Otherwise, your credit may suffer.

Types of Grace Periods

As stated, grace periods vary based on the debt you have and the creditor or lender you’re working with. Below, find a brief overview of the various grace periods you may face.

Mortgage Grace Periods

For mortgages, grace periods are usually around 15 days from when your payment is due. If your mortgage payment is due on the 15th of every month, for example, you have to make the payment by the 30th or you’ll have to pay a late fee. Late fees for mortgages typically range from ​​3% to 6% of the monthly payment amount, depending on the state you live in and the lender..

With mortgage loans, if you transfer to a new servicer, you have a 60-day grace period, meaning you can’t be charged a late fee within that time frame.

Car Loan Grace Periods

When it comes to car loans, grace periods vary by lender, but in most cases lenders offer a 10-day grace period. If you don’t make your car payment 10 days after it’s due, you’ll most likely have to pay a late fee. Depending on your lender, if you fail to make your next payment and default on your loan, your vehicle may be repossessed.

Credit Card Grace Periods

As mentioned, the grace period on your credit card is usually the period of time between when your billing cycle ends and when your payment is due. Unlike mortgage grace periods, credit card grace periods often give you time to pay your entire balance without charging you interest. 

If your card company gives you a grace period and you do not have a balance, then you can avoid paying interest on new purchases if you pay the full balance by the due date. However, if you don’t pay in full by the due date, you will be charged interest on the unpaid portion of the balance.

Since credit card issuers are required to send you your bill within 21 days of when it’s due, you’ll know how much you owe for a billing period for at least 21 days.

Student Loan Grace Periods

If you have a federal student loan, the grace period is the period of time after you graduate, leave school, or go down to below half-time enrollment before you must start to repay it. In most cases, the grace period is six months. Sometimes, however, it will be nine months.

It’s important to note that not all federal student loans have a grace period, so make sure you understand the specifics of your particular loan. PLUS loans, for example, do not offer a grace period. 

Health Insurance Grace Periods

A health insurance grace period is typically 90 days after you have to pay your monthly health insurance payment. If you missed your original payment, you can make it up during the grace period. This will prevent you from losing your coverage. 

The 90-day grace period holds true if you have a Marketplace insurance plan and are eligible for the advanced premium tax credit, or if you’ve paid at least one month of your premium during the benefit year. If you don’t qualify for a premium tax credit, your grace period may be different. Reach out to the Department of Insurance (DOI) in your state to find out what it is.

Key Takeaways

  • Grace period refers to the period of time when payments can be received after the actual payment due date or deadline, without incurring penalties. 
  • There are different types of grace periods, including those for mortgages, car loans, credit cards, student loans, and health insurance.
  • Penalties for making a payment after the grace period may include late fees, higher interest rates, seizure of collateral, and damage to your credit score.