The term "grace period" refers to how long a credit card company gives you to pay your balance due in full in order to avoid interest charges. While many card companies have been reducing grace periods in recent years, there are still good cards available offering at least 25 days. (If yours doesn't, replace it immediately with one that does.) But do you know the answer to this question: If you don't pay in full, instead carrying some part of your balance over to the next month, when will interest charges usually begin on your new credit card purchases?
The answer, which surprises many people, is that interest charges on new purchases are started immediately-on the day of the purchase. In other words, once you carry any unpaid balance over to the following month, you lose your grace period completely until your card balance is paid down to zero. That's why interest charges can mount so quickly, and another good reason for limiting your credit use to an amount that can be paid in full each month.
But let's say that you're not yet at the point where you can pay in full and you're stuck with finance charges for the time being. If you're using one of the major issuers' cards which often carry interest rates of 19.8% or more, here's a strategy for paying off your balance that could get the job done twice as fast.
1. Call MBNA at 800-545-7898 and ask to complete an application for their L.L. Bean Visa card (or complete the application online). It carries a fixed interest rate of just 7.9%, has a 25 day grace period, and no annual fee. This card does charge a 3% fee for balance transfers ($10min-$75 max). Another good option is Simmons First National Bank (800-636-5151). They also have no annual fee and a 25 day grace period, to go along with an 8.95% fixed interest rate and no fee for balance transfers. (Other credit card bargains can be found at Bankrate.com).
2. Request a balance transfer to completely pay off the balance on your old +19.8% card. Then close the old account and destroy your card. The MBNA L.L. Bean card offers 0% interest for nine months on balance transfers, then the usual 7.9% rate after that. You can make dramatic progress during this no-interest introductory period. In most cases, you'll come out ahead paying the balance transfer fee and getting the 0% interest rate for nine months, rather than getting a free transfer but paying interest right away (as you would with the Simmons First National Bank card). Other cards run free balance transfer deals from time to time, so it pays to shop for the best deal-just make sure the rate, grace period, and annual fee measure up as well.
3. Here's the hard part. You now owe as much on your new card as you formerly owed on your old one, and you haven't even charged anything on it yet. Don't start! Not even a little. Not until the complete balance due is paid in full.
4. Set aside an amount that you can pay faithfully. Make it as large as possible, but be reasonable.
5. After you've decided how much to send in each month, add $60 more ($30 if you're single). You're going to come up with this extra amount by emptying your loose pocket change into a "freedom jar" at the end of each day. Most people have $1 or so in change left over from the day's activities, and it usually disappears a little at a time on non-essentials. If you don't usually have $1, adjust the $60 estimate to reflect what you do have.
6. Be faithful. The graph shows the experiences of three families with $3,000 in credit card debt. The Browns decide to keep their current high-rate card, but do manage to halt new charging on it and send in $100 per month. The Jones move to the suggested 7.9% card (paying the $75 balance transfer fee), and also send in $100 per month. The Smiths go all the way, switching to the 7.9% card, paying the transfer fee, and using the "freedom jar" idea which enables them to send in $160 per month.
