Grace Period vs. Moratorium Period: An Overview

While they may sound similar, there are some key differences between a grace period and a moratorium period. Learn more about both and how to utilize them in your financial planning strategies.

Key Takeaways

  • A grace period falls between the time when a credit card billing cycle ends and when the payment is due.
  • A moratorium period is when your lender allows you to stop making payments for a specific period of time.
  • A moratorium is similar to a deferment or forbearance.

Grace Period

grace period falls between the time when a credit card billing cycle ends and when the payment is due. This grace period is an interest-free time frame that gives you several days to pay before the lender begins charging interest on the balance for that month. You will not be charged interest on the part of the balance that is paid during the grace period. Grace periods are not required by law, but lenders usually give one of between 21 and 25 days. If they do offer a grace period, the law requires that they send you a bill at least 21 days prior to the due date.

If you pay off the entire balance of the bill during the grace period, then the money you borrowed is like a free loan, because you are not paying anything for the privilege of using it. According to a 2018 study by the American Bankers Association, 29% of consumers take advantage of this grace period to pay off their credit card balance in full each month.

A grace period is a use-it-or-lose-it type of situation. If you leave a balance on your card from the previous month, then not only do you pay interest on that amount; you also pay interest on any future charges from the day that you make the purchase. So if you pay $200 on your $500 credit card balance, you will be charged interest on the remaining $300. Then if you go out the next day and buy something for $500, you will also start accruing interest on that $500 purchase. Sometimes it takes up to two billing cycles of paying in full before you regain the privilege of a grace period.

Moratorium Period

A moratorium period, which is similar to forbearance or deferment, is when your lender allows you to stop making payments for a specific period of time and a specific reason. Usually, the reason involves some kind of financial hardship. Your lender would rather give you a few months to get on your feet than have you default and stop paying altogether because the account went into collections.

In a way, a grace period and a moratorium period are the same, in that they are both a time frame during which you don’t have to make a payment. The differences are that a moratorium period is much longer than a grace period and interest may be charged during it. Another difference is that if a lender offers a grace period, it is automatically extended to all customers. By contrast, a moratorium period must be requested by an individual cardholder, and the lender must approve the request. There is no guarantee of a moratorium period.