This is true, which is why Paul says in Romans 6:1-4, "What shall we say then? Are we to continue in sin that grace may abound? By no means! How can we who died to sin still live in it? 3 Do you not know that all of us who have been baptized into Christ Jesus were baptized into his death? We were buried therefore with him by baptism into death, in order that, just as Christ was raised from the dead by the glory of the Father, we too might walk in newness of life."
When God forgives a sinner, it is not that he may go on sinning in a cavalier manner. It is so that he will be made new. The one who is forgiven much loves much. He does not presume upon God's grace.
You are absolutely right that God is both merciful AND just. Indeed, it is specifically BECAUSE he is both that he cannot wink at sin and forgive it without an atonement being made. Again from Romans, this time chapter 3, Paul wrote that Christ Jesus was put forward by God "as a propitiation by his blood, to be received by faith... so that he (God) might be just AND the justifier of the one who has faith in Jesus."
You are also confusing hell with the Roman Catholic concept of purgatory. The first is a one way ticket, and the second does not exist. When you sin against an infinite God, a finite man has no means of serving time in hell long enough to pay his debt.