A credit card issuer can continue to charge interest after death. However there are specific rules in place for estate that protect heirs.
One cardholder asked, “Can interest on a credit card balance keep building up after death?”
Federal law doesn’t automatically halt interest on an individual’s credit card account. Legally, the costs become an obligation of the estate.
Unless, that is, the card is a joint account with a co-signer who is equally responsible for the debt. In that case, the co-signer becomes solely responsible. (Authorized users of a card who are not co-signers are not responsible for the debt.)
If there is not a co-signer, it may be possible to get the card issuer to halt interest – and even settle the balance for a fraction of the amount due, legal experts say.
Before coming to that, here is what the Credit CARD Act protections say. Under regulations that implement the law, there are limits on charges the lender can assess if the sole cardholder dies.
See related:Six steps to take when credit card holder dies
Limits on fees and rates
Once an estate administrator gets in touch with the card issuer, the company should provide the balance due within 30 days of the request.
Once the card issuer has received this request from the estate, they “must not impose any fees on the account [such as a late fee, annual fee or over-the-limit fee] or increase any annual percentage rate,” the regulation states.
There are two exceptions to the freeze on APRs:
- If a temporary rate expires.
- If a variable rate that is linked to market interest rates goes up.
The rules on rates protect the cardholders’ heirs, the beneficiaries of the estate, from a sharp increase in interest rates on the grounds that the risk of nonpayment on the account has increased. Credit card agreements commonly say that the death of the cardholder puts the account into default.
Residual interest waiver
When you’re alive, you can be charged interest for a billing period even if you pay the entire statement balance for that period.
This “residual interest,” also called “trailing interest,” reflects the daily interest charges that built up during the days before you paid the balance down to zero.
But after death such charges for residual interest must be waived, or rebated to the account, if the full balance is paid within 30 days of the card issuer’s disclosure of the amount owed.
Tip: Unsure about your cardholder rights? The right to opt out of, or reject, certain significant changes on terms on your account and the right to opt out of limits on over-limit fees are two of 12 consumer protections included in the Credit CARD Act of 2009.
Settlement of the debt is possible
Beyond the protections in the rules, the death of the sole responsible cardholder gives heirs or the estate administrator leverage to negotiate a settlement for less than the full balance, estate lawyers say.
Under state laws, creditors must file a claim on the estate for payment through the estate assets. That process can be time consuming. What’s more, it may leave the creditor empty-handed, if the estate has little assets.
Altman recommends telling the card issuer they can have a portion of the balance immediately as a settlement, avoiding the formal claim process. A quick resolution will also keep interest from building up in the account.
The big exception is for cards that are secured by funds in a bank account. Secured credit cards are one example. In addition, many credit cards issued by credit unions hold a claim called a “security interest” on the cardholder’s account at the credit union.
Card issuers who have such a security interest know that they are likely to get 100 percent of the balance due. When dealing with them, it is especially important to keep in mind the federal protections against fees and interest rate increases.