Trailing Interest
Interest Rates
Interest rates is the price a borrower pays for using money they do not own, like for using a credit line in a credit card. Interest rates are normally computed as a percentage over a period of one year. One type of interest that are charged to credit card holders is called trailing interest.
Trailing Interest
A trailing interest allows credit card companies and other financial institutions to compute balances that leave a credit card holder still owing the company interest after they assume that the entire balance of a credit card has already been paid in full.
The method of computing trailing interest is considered by a lot of people to be sneaky and unfair. This type of interest is computed and charged up to the day of a complete payment. For example, a credit card holder receives a billing statement for the billing cycle from the 1st to the 30th of the previous month. The credit card company receives the credit card holder’s payment on the 10th. Next month, the credit card holder still gets a bill for the interest from the 31st to the 10th.
The trailing interest is computed on a daily basis instead of monthly and because of this, the credit card holder is left with a balance to pay even though they think they may have already settled their credit card balance in full.
Trailing interest is also defined as the interest method of balance calculation that allows credit card companies and other financial institutions to reach back into previous billing cycles to collect interest on the balances that have already been paid off.
How to Avoid Trailing Interest
One way to avoid trailing interest is to choose an instant payment method. An example would be to go directly to the bank on or before the due date printed on the billing statement and pay the bank in cash. By going to the bank directly and paying off the balance, the credit card holder is assured that their payment will be posting to their account on the same day
Another way to avoid getting charged a trailing interest is to make sure that the credit card holder will mail their payment to the credit card company ideally on the same day or the following day so that the credit card company will receive the payment several days before the due date. If the credit card holder cannot personally go to the bank for any reason, they can just mail their payment ahead of time. Since mail takes about 3 – 5 business days, mailing the payment ahead of time will ensure that the credit card holder does not get charged any trailing interest.
Another way to avoid trailing interest is to go to a payment center on or before the due date and make the payment there. Since payment centers may take several days before the payment a credit card holder makes posts to their account, making the payment early ensures no trailing interest will be charged.