What should you do during interest-free grace periods?


You've seen the promotions: buy an entire entertainment system, a new car or even your house with an interest-free grace period that could last for months.

It's an enticing deal - you get to go home with your new purchase without worrying about making a payment until later. But what should you be doing during this interest-free grace period?

"You have to know what you're getting yourself into with these interest-free deals," says Isaiah Chan, a program manager at the Credit Counselling Society.

Most people need the grace period to pay off the debt for the big-ticket item, he says. "That's the concerning part of this whole gimmick."

If you're financially astute, though, interest-free grace periods "can be used to your advantage and give you time to get your ducks in a row," says Mark Kalinowski, a Calgary-based credit counsellor.

Here are three steps to take before and during your interest-free grace period.

1. Read and understand the fine print.
Understand the terms of the contract because grace periods often come with a catch, the experts warn.

"In some cases, if it's not paid off in six months, you're charged interest, or if you're carrying a balance once the period ends, you could be charged interest for the entire sum," Kalinowski says.

Chan says some interest rates once grace periods end could be as much as 21 per cent.

"You get hit pretty hard so it's something clients need to be aware of: Can I actually pay this off before the grace period is over?"

Use your interest-free period to prepare and adhere to a budget so you aren't caught out when it's over.

There could also be administrative fees for the interest-free promotion, Kalinowski says. Factor these fees into the total cost of your purchase so you can budget properly.

2. Stash away funds for after the grace period.
Ideally, you'll pay off your item before the interest-free period ends. However, if you know you won't be able to pay the purchase price, you should use the interest-free time to stash away funds.

It's like an emergency fund, but specifically for your loan, Kalinowski says. "Put the money into a savings account, something separate from your everyday account," he says.

Once the grace period expires, you'll either have enough to pay off the remaining balance or you've at least created a financial buffer.

3. Pay off high(er) interest debt.
Perhaps you have a balance on a credit card with 22 per cent interest. If you still have that balance when your interest-free period expires on your new purchase, and you end up paying 21 per cent interest on that balance, you've suddenly got two high-interest payments.

To avoid this worst financial case scenario, use the interest-free period to pay down your other high-interest loans.

"If my client is already in debt and they've got high interest rates, the argument can be made to put the money toward that debt - whatever will help the bottom line," Chan says.

Think before you buy
If you haven't moved forward with the purchase, ask yourself why you're relying on this grace period to make the purchase. If you can't pay for it outright, can you afford it at all?

An interest-free grace period might be beneficial if you're buying your house - a major life milestone you likely thought through - but it may not be as advantageous if you're splurging on something like a TV.

"We see a ton of this here at credit counselling, where clients who have done interest-free grace periods for furniture or smaller items are in situations where they regret jumping into it," Chan said.

Kalinowski has seen people use interest-free grace periods as an excuse to buy more than what they need. If you need to replace your fridge, for instance, buy what you can afford instead of splurging on a fancier, pricier model.

The bottom line? Interest-free grace periods are great tools but only if it's for a product you actually need, and if you can pay off the purchase before hefty interest rates kick in.

"It's allowing someone to get something they need before they need to pay," Chan says. "If you're wise about your budget, it comes at little or no cost to you."

See related: Beware 'buy now, pay later' ads, Store credit cards: the good, the bad and the ugly
Published June 8, 2017

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