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. Grace periods allow a buffer between when a billing cycle ends and the payment is due. This period does not earn interest.

A moratorium is a pause on payments for a certain period of time. The reason is typically financial hardship and the period of the moratorium is agreed upon with the lender. Knowing the difference between grace periods and moratoriums, and utilizing them appropriately can help with financial planning strategies.

Grace Period

A 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.

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 but 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 for 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.

Key Differences

A moratorium will almost always be longer than a grace period because financial hardship takes longer to recover from and the period is agreed upon between the lender and borrower. A grace period is usually a standard period in the terms of a credit card and is decided by the lender beforehand.

As grace periods are usually standard in a credit card contract, all borrowers have the same grace period and are subject to the same terms. It is automatically extended to all customers. A moratorium is a special request by the borrower and is customized to every individual borrower depending on their need. The lender must approve the request and there is no guarantee of a moratorium period.

In a grace period, if the borrower does make the payment, they will be penalized with fees and other penalties. In a moratorium, there are no charges or fees as the stop in payment has been agreed upon by the two parties.