Card debt will be charged interest even if account is closed

Reduce interest costs by taking advantage of 0-percent balance transfer deals

To Her Credit columnist 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, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
I had a credit card, but I decided to close it. However, the credit card issuer is still charging interest on the remaining balance. Why is the issuer doing this if the account is no longer active? – Ann


Dear Ann,
Banks charge interest on money you owe, for as long as you owe it. It doesn’t matter if the account is closed. As long as you owe a balance, the bank has the right to charge interest according to the terms of your agreement.

If this were not true, everyone would run up large balances on high interest cards, and then close those accounts, stopping all interest charges while they paid off the cards over the coming months or years. That would leave banks, which already paid the merchants on behalf of the cardholders, out the money and not collecting interest on the charges. This wouldn’t be fair or make it possible for banks to stay in business.

It sounds as if you’ll have to find some other way to get out of paying those additional interest charges as quickly as possible.

The first thing you may want to try is lowering the interest rate you are paying. For example, if you can get a balance transfer card with a 0 percent introductory rate, you may want to transfer the balance from your closed account to the new card. While you are in the introductory period, 100 percent of your payments will go toward your balance. As a result, you’ll be able to pay off your closed card faster. You may be motivated to pay it down even before your 0 percent introductory period ends.

Another option is to transfer your balance to a card with a lower interest rate. Even a few points’ difference in interest rates can save you a lot of money.

Whichever balance transfer option you choose, be sure to consider balance transfer fees. A few cards don’t charge balance transfer fees, but many charge a 3 percent fee on the amount you transfer. If you can save more than that on interest, it’s still a good deal.

Beware of introductory interest rates if you cannot pay off your card balance before the promotional period ends. In addition, avoid putting new charges on the cards after making the balance transfer. It would be a shame to get new cards as part of a get-out-of-debt strategy, only to find yourself deeper in debt.

If you don’t want to open a new card, there are other ways to quickly pay off your closed card debt and stop paying interest on it. If you own a home and you have equity in it, you may want to consider a home equity loan to pay off your card debt. The home equity loan should have a much lower interest rate, because it is secured by your home. Any interest on the loan should be deductible on your tax return if you itemize deductions. This is best used as a one-time strategy to pay off debt quickly. Repetitive refinancing or procuring home equity loans will hurt your chances of ever building up equity in your home.

Of course, the faster you pay off your debt, the less interest you will pay on it. You can go on a temporary austerity plan, putting as much money as possible every month toward debt reduction. Look for any valuable assets you could sell to raise cash. Perhaps you can earn some extra money every month. It can make a big difference. Once you’ve paid down the interest charges for the month, every dollar you can find to lower your balance saves you on interest going forward.

If you are trying to get out of debt, closing a credit card was a good start. Even though it does not stop interest charges, it does stop you (and anyone else) from making new charges on the card. Trying to pay off a credit card while continuing to use it can feel as if you are running up the down escalator. It’s hard to get ahead. With the account closed, you are ready to make real progress on becoming debt-free.

See related: Help! I maxed out 5 cards to 'help' online boyfriend, Micropayments help debt management, credit scores

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Updated: 11-25-2017