Residual interest: What you need to know

Residual interest—also known as trailing interest—is interest that accrues on a loan balance from the time between the end of a billing cycle and the date the issuer receives payment. If you always pay your bill in full, this probably doesn’t apply to you because of the legally required grace period. But once you carry a balance from month to month, residual interest kicks in.

Here’s what you need to know about residual interest and how to avoid it.

What is residual interest?

To understand residual interest, you first need to know how billing cycles work. Credit card issuers send you a statement after the closing date of each billing cycle. The statement will tell you how much you owe for that billing cycle.

By law, issuers must send the statement at least three weeks prior to your payment due date. That means there are at least three weeks between when you have your bill and when you’re required to pay it. That’s nice for planning purposes, but interest continues to accrue daily on your unpaid balance during that time. So after you’ve paid the full amount on your statement, you still have to pay the interest that accrued after your statement was sent. This amount is added to your next statement.

Residual interest builds up only if you carry a balance from month to month. If you pay in full each month, your issuer will grant you a grace period. This means you won’t be charged interest between the end of the billing cycle and the payment due date.

Residual interest example

Let’s say your billing cycle ends on the first of the month. You’ll receive your credit card statement with the total amount you owe that month, including interest. For this example, let’s say your statement balance (including interest) is $580. The issuer receives your payment of $580 on your due date three weeks later. However, throughout those 21 days, interest was still accrue on your unpaid balance. You might owe another $10 in interest, which would be applied to your next statement.

Do all credit cards charge residual interest?

Most credit card issuers charge residual interest, but their policies regarding how and when they charge interest vary. Double-check your cardholder agreement to learn your issuer’s rules about residual interest and how they apply to you. You can find this agreement on the issuer’s website or you can request a copy if you can’t locate it online.

Why it’s important to keep track of residual interest

The biggest problem with residual interest is visibility. Unless you know to keep an eye out for it, it’s easy to overlook. Especially if you made a final debt payment and think that you have no more payments to make. If you aren’t monitoring a used credit card, it’s easy to see how you might not notice residual interest charges right away.

Missing an unexpected credit card bill made up of residual interest can not only cost you more money but also can affect your credit score. Payment history makes up 35 percent of your FICO score and is “extremely influential” in the VantageScore model. If you accidentally miss credit card payments consisting of residual interest, you can damage your credit score as a result. The longer it takes you to notice, the worse things get. Even once you pay off the late residual credit card interest, it may take several months for your credit score to bounce back.

If you close your account after paying off your credit card debt, your issuer can still charge you for interest and fees that accumulated during the time between your last statement and payment. It’s important that you review your account agreement carefully to understand how your lender calculates interest and fees. You can also contact your lender for more information.

If you are concerned that you’re being charged for any fees or interest that you shouldn’t be, you can file a written billing error dispute to state your concern within 60 days of the incorrect statement. You can typically learn more about how to file a written billing error dispute from your billing statement.

How to avoid residual interest

Whether you’re trying to get a handle on your regular credit card payments or working to pay off an accumulated credit card debt, there are some steps you can take to avoid residual interest.

Pay the full payoff amount

When making your credit card payment, check your credit card statement from the previous month to see if you owe any residual interest. This way you can pay the amount owed rather than the previous statement’s balance. This total amount will include that balance as well as any additional interest that has accrued between the end of the billing cycle and the date you made your payment.

Pay your bill early

If you can commit for a few months to paying your full balance early, there won’t be a balance to generate residual interest in the first place. You can do this by logging into your online account on the final day of your billing cycle, viewing your current total balance and paying that amount.

After a few months, you might earn back a grace period from your issuer, meaning you won’t be charged interest between the end of your billing cycle and your payment date. Then you’ll have a little more breathing room before having to make that credit card payment each month and you can go back to paying your bill on your due date without accruing residual interest. Keep in mind, though, that as soon as you start to carry a balance again, you’ll lose that hard-won grace period.

Apply for a balance transfer credit card with a 0 percent intro APR

If you have a sizable credit card balance, you may want to consider a balance transfer to a 0 percent APR card. The best balance transfer credit cards offer an introductory period of 18 months or longer, during which you won’t be charged any interest. This can help prevent your existing debt from growing while you work to pay it down.

Bankrate’s credit card payoff calculator helps you determine how much you’ll need to pay each month by taking into account your card’s balance, interest rate and how many months you want to take to pay it off. You can also use this tool to test out the payoff timeline of any 0 percent intro APR cards that interest you.