If it’s ever happened to you, then you understand how intensely frustrating it can be: you go to pay off a credit card balance in full. Congratulations – you’ve achieved the holy grail of consumer credit! You mail in your payment (or pay it online, or by phone), and think –reasonably – that your balance is now zero. But then, the next month, you receive your monthly bill telling you that you owe more money. You paid before the due date, and you haven’t made any new purchases. What gives?
Basically, the credit card company in question calculates your interest on the basis of trailing interest, also called residual interest. Even though your balance was paid off in full, you still accumulated finance charges between the statement date of your last billing cycle and the date on which you actually paid the balance off. This is a potential hazard for consumers who carry a balance over every month, as opposed to paying their balance off in full. Customers who pay their credit card balance in full receive a grace period: an interest-free period of time between the date of their purchases and the due date of their next month’s bill. Carrying over a balance negates that interest-free period. Therefore, you pay trailing interest. Interest charges, therefore, rack up on your balance until the date of payoff. Therefore, you’ll have a small bill the month after you believe you’ve cleared your bill. It seems unfair, but it’s unfortunately quite legal.
This isn’t to be confused with double-cycle billing, which is now banned in the United States under the Credit Card Accountability, Responsibility and Disclosure Act of 2009. Double-cycle billing as a financial term refers to the method of calculating monthly finance charges using the average daily balance from the current and previous billing cycle. Under the CARD Act, the double-cycle method of finance charge computation is banned for being unfair and anti-consumer. Computation of residual interest is still allowed, however. It’s no mystery why this method of balance computation is tremendously preferable to card issuers – they get more money off you, even after you have technically freed yourself from their clutches!
If you are ever in a position to pay off a credit card balance and want to avoid the hassle of dealing with double-cycle billing, then here’s what to do: call your card’s customer service phone number, and talk to a representative. Ask them what the balance on your plastic will be in ten days, and then pay that amount instead of the one on your bill. It’s likely that you might overpay by a little bit, but many people can stomach this better than receiving another bill. If you aren’t bothered by having to pay again, then just make sure that you check your balance the next month and pay whatever is left over. Congratulate yourself for making the prudent decision to eliminate some of your debt, and subsequently free yourself at least partially from the burden of being victimized by credit card issuers and their costly, sneaky practices.
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