Grace is a free gift. Mercy is not giving someone what they deserve – and none of us deserves the unconditional love of a holy and just God. He must punish sin. The great part is, He took that punishment Himself when He died on the cross.
By paying attention to the heart of a person, we demonstrate both. This is true whether you enforce rules or whether you just lead Bible studies and teach others about the love of God, and how they can be saved and grow closer to Him.