What is residual interest?
You could owe on your credit card account even if you pay off your balance. That’s because residual interest accumulates between the date on your billing statement and the date you make the payment. Also known as trailing interest, this applies if you are carrying a balance from month to month, or if you have a balance transfer or cash advance balance.
For example, if you receive your credit card statement on June 10 and make the payment on June 20, there are ten days after the statement date. This is where interest will still accrue from previous balances. Your issuer will include this interest amount on your next statement. It’s important to understand how residual interest works to avoid any unexpected charges.
How residual interest can affect you
You may have made a payment to your issuer for the amount shown as ‘balance due’ on your latest statement, but this will not include residual interest. As a result, you might ignore subsequent statements assuming that your balance is $0 and you owe nothing. The longer it takes you to make the payment, the more residual interest will accrue.
Many credit cards also come with interest-free grace periods, but do not assume that this is the case for your account. These grace periods only apply to new purchases and for customers who clear their balance in full each month. Interest will accrue if you carry a balance forward.
Making a small mistake on how much you owe on your credit card could have serious implications. Your issuer can charge you penalty fees for late or missed payments. They can also report a delinquent payment entry to the credit bureaus, which could damage your credit score.
How to avoid residual interest
Clearing your full credit card balance each month is the best way to prevent residual interest from building up on your account. You will also benefit from a grace period on new purchases, meaning you won’t owe any interest at all on your credit card.
You may also be able to avoid residual interest if you are using a credit card with an interest-free introductory offer. During the promotional period, you won’t owe any interest on your purchases. Make sure you understand the terms of the credit card, as these offers are temporary. Once the period comes to an end, interest will be due on your balance.
If you do have an existing balance and want to clear it, contact your issuer and ask for the full payoff amount. Tell them when you are planning to make the payment so they can calculate the exact amount you owe to that date, including all interest charges.