Accrued Interest After Paying Off a Credit Card

The interest rate on a credit card determines how much interest you will pay on any debt carried on that card. Reducing credit-card debt can be a wise financial move since the less debt you have, the higher your credit score, according to FICO. If your goal is to pay off a credit card, it's wise to understand how to handle accrued interest that occurs after a payoff.

Considerations

A credit-card bill covers a specific time frame. This is called your billing period. Once you pay off the card according to the amount present on your billing statement, that amount does not include any finance charges that may have accrued since the day your bill was printed but before your payment. If you only pay the total balance due on the statement, chances are you will owe a few dollars more in accrued interest charges. This amount will appear on your next bill.

Significance

Accrued interest after a payoff can potentially damage your credit. If you pay off a credit card and owe accrued interest, the card issuer will add that to your next bill. If you assume that you've paid the bill down to zero and fail to realize that you still owe money on it, the bill may pass the due date and become delinquent. If the bill is delinquent for 30 days, the card issuer will report that delinquency to the credit bureau. The issuer may also charge you a late fee, which increases the amount that you owe.

Consequences

The data in your credit report determines your credit score. According to MSN Money, the higher your score, the worse the damage from a late payment. A score of 680 may drop 60 to 80 points from a 30-day late payment. A score of 780 may drop 90 to 110 points. A late payment remains on the credit report seven years from the date it appears on your report. A damaged credit score can lead to higher interest rates and denials for other credit products.

Prevention/Solution

If your goal is to completely pay off a credit card, you may want to consider overpaying the bill to account for unbilled interest charges. If you know the interest rate on your credit card, you can multiply that by the balance on the card. This will give you an estimate of the monthly interest charge on that debt. If you overpay for the interest, you will have a credit and the card issuer will refund any overpaid monies back to you once the final interest charges have been applied to your account.

References

• MyFICO: How to Repair Your Credit and Improve Your FICO Credit Score
• Cleveland.com; Overpaying Credit Card Bill Can Cover Accured Interest: Money Matters; Teresa Dixon Murray; March 2010
• MyFICO: What's In Your FICO Score
• MSN Money: 5 Ways to Kill Your Credit Scores; Liz Pulliam Weston; November 2009
• Business Dictionary: Interest

Resources

• MyFICO: What's In Your Credit Report