credit cards

Is interest after credit card payoff legal?

Leslie McFaddenq_v2.gifDear Credit Card Adviser,
I paid off my credit card balance by the due date and then I got a bill the next month stating I owed more money. I contacted the company and they told me it was for interest before the account was paid off. I don't understand. The other accounts that I paid off have a zero balance and did not try and charge me anything extra. Can they do this and is it legal?
-- Deborah

a_v2.gifDear Deborah,
What you describe concerns "trailing" or "residual interest." The bank sent you a bill for the finance charges that accumulated on the balance between the end of the previous billing cycle and the time of payoff.

When you pay in full every month, a grace period -- the interest-free period for new purchases -- would normally cover this stretch of time and you wouldn't have to pay trailing interest. Carrying a balance as you did usually negates the grace period, which means that finance charges would apply to the balance until the date of payoff. That's why the bank sent you one last bill for interest charges.

It may feel unfair and counterintuitive, but it's legal.

Don't confuse residual interest with two or double-cycle billing, which the Credit Card Accountability, Responsibility and Disclosure, or CARD, Act of 2009 bans. Most of the provisions in the new credit card law went into effect Feb. 22, 2010. Double-cycle billing is the practice of computing finance charges using the average daily balance from the current and previous billing cycle. The CARD Act prohibits the double-cycle method of finance charge computation, but doesn't outlaw its first cousin, residual interest.

Your best bet is to just pay off the final bill and get on with life. If you never want to deal with residual interest again, call before you pay off an account and ask what your balance will be 10 days from now and then pay that amount. You might overpay slightly, but a credit may feel better than yet another bill. If you don't go this route, simply check your statement the following month to find out whether you owe residual interest.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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