Can Creditors Charge Interest on a Closed Account?

Many consumers assume that closing a credit account means the end of all financial obligations associated with it. However, this is a common misunderstanding that can lead to unexpected interest charges. While an account might be closed for new transactions, any outstanding balance remains subject to the original terms of the credit agreement. Understanding how and why interest continues to accrue on these accounts is important for managing personal finances effectively.

Understanding “Closed Account” and Accruing Interest

A “closed account” from a creditor’s perspective means that no new purchases or credit extensions can be made on that account. This action prevents further use of the credit line, but it does not automatically extinguish any existing debt. If a balance remains on the account when it is closed, the terms and conditions outlined in the original credit agreement regarding interest, fees, and payments remain in effect.

Interest continues to apply to this outstanding principal balance. The annual percentage rate (APR) specified in the original agreement continues to be charged on the remaining debt until it is paid in full. This means that even after an account is closed to new activity, the debt can continue to grow if only minimum payments are made, or if payments are missed.

Circumstances Allowing Continued Interest Charges

Interest can continue to be charged on a closed account under several circumstances. The most common scenario involves an existing outstanding principal balance. If any debt remains when the account is closed, the creditor has a right to apply interest charges as per the agreed-upon terms until the balance reaches zero.

If the account goes into default or becomes delinquent before or after closure, creditors may apply a higher penalty rate, which increases the amount of interest owed. Such penalty rates are triggered by missed payments and are applied to the entire outstanding balance.

If a creditor obtains a court judgment for the unpaid debt, the judgment itself accrues statutory interest until the debt is satisfied. Certain fees, such as late payment fees, can also be added to the outstanding balance and subsequently accrue interest if they are not paid promptly.

Consumer Rights and Regulatory Protections

Consumers have rights and protections governing interest charges on closed accounts. The original credit agreement is the primary document, as it defines the interest terms and conditions that apply even after an account is closed for new transactions. This agreement dictates the permissible interest rates and how they are calculated.

The Truth in Lending Act (TILA) requires creditors to clearly disclose interest rates and terms, ensuring consumers are informed about the costs of credit. The Fair Debt Collection Practices Act (FDCPA) protects consumers from abusive debt collection practices, including misrepresentation of amounts owed or illegal interest charges. Under the FDCPA, a debt collector cannot collect any amount, including interest, unless it is expressly authorized by the original agreement or permitted by law.

State laws play a role, with usury laws setting maximum interest rates that lenders can charge on certain types of debt. Consumers also retain the right to dispute inaccurate charges or unauthorized interest, which involves formally notifying the creditor of the discrepancy.

Strategies for Addressing Interest on Closed Accounts

Consumers facing continued interest charges on closed accounts can take several steps. First, review past account statements and the original credit agreement to understand the terms that govern the debt. This verifies the accuracy of the charges and the applicable interest rates.

Next, communicate directly with the creditor or debt collector. Consumers can request validation of the debt to ensure its legitimacy and inquire specifically about the interest charges being applied. If the interest charges appear incorrect or unauthorized, a formal dispute can be initiated.

Negotiating a settlement with the creditor or collector is an option to reduce the overall debt and stop future interest accrual. Creditors may be willing to accept a lump sum payment that is less than the total outstanding balance, especially if the account is delinquent. For complex situations or persistent issues, seeking advice from a non-profit credit counselor or a legal professional can provide valuable guidance and support.