Do Credit Cards Continue to Charge Interest After They Close an Account?
High interest rate is a common reason consumers choose to close their credit card accounts, hoping to avoid high finance charges. However, in most cases, the credit card company continues to charge interest on the outstanding balance until it's paid off. U.S. government regulations ensure credit card companies don't increase the interest rate on closed accounts.
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Closed Credit Card Account
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A credit card company has a right to close a consumer's account due to his poor credit rating. A consumer may close his account at any time for any reason. Although the consumer can no longer use the account to obtain credit, the credit card company doesn't consider it closed until the balance has been paid off. As long as the account has a balance and payment activity, the credit card company considers it active and continues to report it as such to credit bureaus. When the consumer makes the final payment to pay off the entire balance, the credit card company updates the account status to "closed" -- meaning it is no longer active.
Interest Charges
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A credit card is a revolving loan with an interest rate and a predetermined limit. A consumer can borrow up to that limit over and over as he reduces the outstanding balance by making payments. A consumer can avoid paying interest by paying off the entire account balance by the due date. If a balance rolls over to the next month, the credit card company will charge interest on that amount. Credit card companies can change interest rates on accounts based on consumers' creditworthiness. They continue to charge interest on closed accounts unless special arrangements have been made.
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The Credit CARD Act of 2009
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The Credit Card Accountability Responsibility and Disclosure Act of 2009 imposes several restrictions on credit card companies. They are obligated to give a 45-day notice to consumers before increasing interest rates on their accounts. The Act does not allow a credit card company to change interest rates and terms on closed accounts. A consumer will continue to pay the same interest rate on his closed account until the balance is paid off. Credit card companies cannot charge interest on fees, such as late or over-limit charges.
Credit Card Settlement
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If a consumer's credit card account is past due and he has difficulty making his payments, he may consider a debt settlement program. Debt settlement and counseling companies negotiate a settlement with credit card companies to reduce the payoff amount or the interest rate. In some cases, a credit card company may lower the interest rate to as little as 0 percent while the consumer remains in a debt counseling program and continues to make payments on time. You also can negotiate a settlement yourself by communicating directly with a credit card representative, without the aid of a debt settlement company.
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References
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