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'Residual interest' makes credit card bills tough to pay off

The balance was paid, then you got another bill. And another. Why?

By Sally Herigstad

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Question for the CreditCards.com expert Dear To Her Credit,
I paid off my credit card before the due date in February. I knew I'd have some residual interest to pay off and that bill came in only a couple of weeks later. I have gone two months now without hearing from the credit card company (I even checked my account balance on their website to ensure I had a zero balance) because it was my understanding that everything was paid off in full.

The other day, however, I received a bill for $1.50! The statement even said I had a zero balance so (furiously) I called the number on the back of the card. Oddly enough, the customer service representative knew why I was calling. She took the charge off and tried to explain it was residual interest. That is impossible due to the facts I stated above.

Is the card company trying to scam me? Are they being totally honest with me? Thanks in advance!  -- Patrice

Answer for the CreditCards.com expert

Dear Patrice,
I've got to hand it to you. I'm not sure I would have picked up the phone and called customer service (and risk getting put on hold for 20 minutes) just to clear up $1.50. But I'm glad you did.

I don't think the company was trying to scam you in this case. They're certainly not going to clear a profit by sending out bills for $1.50. Don't overestimate the intelligence of a computer-run billing system! Here's what probably happened: The last $1.50 represented residual interest on the residual interest.

When you pay off a car or home loan, banks deal with this problem by giving you a payoff amount that is valid up to a certain date in the future. The interest until that date is already figured in. Your credit card company, on the other hand, only figures interest as of the moment of the billing date -- a date in the past by the time you receive the bill.

Time passed between when the card issuer sent you that bill in February and when you got the next bill, the one with the residual interest. Even if you paid that second bill off right away, the interest clock was still ticking between when the card issuer sent the second bill and when your payment was credited. That left the $1.50, and the computer dutifully spit out another bill.

I think the representative did you and her company a favor, because that cycle of interest-on-interest payments could have gone on for several more cycles, with you both wasting time and stamps paying a smaller and smaller morsel until the interest-on-interest charges eventually rounded down to zero.

If this comes up again, call them when you get a card statement you intend to pay off in full. Ask them to calculate what the charge will be a couple weeks in the future. Pay that amount, which should erase the residual interest that piles up while the check is in the mail.

But there's one more reason to put up a fuss over a $1.50 bill.

You worked hard to pay off your credit card bill. You may have been paying interest charges for months or years, and when you finally made the final payment, you thought you were done. From now on, you would only pay once for the things you buy. A $40 meal should only cost $40 -- not $50 or $80, as it does when it's added to a big credit card balance and the payments are dragged out for years. With your bills paid off, you've developed a healthy aversion to paying any interest expenses at all.

Now that you've become so averse to paying interest expense that you'll call the bank over $1.50, I'm sure you'll be watchful over other interest expense and fees, too. You may have small minimum payments sent automatically to your credit card company, so you'll never run the risk of a late payment fee (which could be $30 or more if you're one day late!). If you ever have more expenses on your credit card bill than you can pay from your checking account, you'll take a "loan" from yourself by juggling other accounts, working extra hours or even selling something before you let a balance carry from one month to the next. Remembering how upset you were over $1.50, you'll quit using credit cards completely before you'll allow your balances to start creeping upwards again and the interest charges to start piling on. From now on, you'll spend your money on your intentional priorities, not on interest charges on stale, old bills.

Keep up the good work! Welcome to the zero balance club, and take care of your credit!

See related: 4 ways to shorten lengthy credit card payoff

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Published: April 13, 2012


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