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 and if your issuer offers a grace period, this may not apply to you, and you may be able to avoid it altogether. But once you carry a balance from month to month on a card without a grace period, 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 and grace periods work. After the closing date of each billing cycle, credit card issuers send you a statement that tells 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 if your card doesn’t have a grace period, interest continues to accrue daily on your unpaid balance. After you’ve paid the full amount on your statement, you’ll still have to pay the interest accrued after your statement was sent. This amount is added to your next statement.

Grace periods

Grace periods are offered on most credit cards, meaning you won’t accrue interest during the window between the end of your billing cycle and your due date. If your card has a grace period and you pay your statement balance in full each month, residual interest won’t accumulate.

However, keep in mind that not all credit cards have grace periods — and even cards with grace periods may exempt certain types of transactions (such as balance transfers or cash advances). 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 request a copy if you can’t locate it online.

Residual interest example

Let’s say your billing cycle ends on the first of the month, and your card has no grace period. Shortly after your billing cycle ends, you’ll receive a 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 still accrued on your unpaid balance. You might owe another $10 in interest, which would be applied to your next statement.

Why it’s important to keep track of residual interest

The biggest issue with residual interest is visibility. Unless you know how to keep an eye out for it, it can be 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 an unused 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 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 it gets. Even after you pay off the late residual credit card interest, your credit score may take several months 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’re 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 accumulated credit card debt, there are some steps you can take to avoid residual interest.

Choose cards with grace periods

As cards with grace periods typically don’t accrue residual interest, the easiest way to avoid these fees is to consider cards that offer this exemption. Once you choose a card that offers a grace period, pay your statement balance in full each month. Be sure to refer to your cardholder agreements, as making late or minimum-only payments may cause your grace period to not apply.

Pay your bill early

If you do wind up with a card without a grace period, paying your full statement balance early means there won’t be a balance to generate residual interest in the first place. You can do this by logging in to your online account on the final day of your billing cycle, viewing your current total balance and paying that amount.

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 need 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.

The bottom line

Understanding residual interest and its implications is important for managing credit card debt effectively. By knowing how residual interest works, monitoring credit card statements diligently and taking proactive steps to address any accrued interest, you can avoid potential financial costs and negative impacts on your credit score. If necessary, consider strategies like selecting specific cards, paying early or using balance transfer credit cards with 0 percent introductory APR to minimize the impact of residual interest.

FAQs

• Are residual interest charges applicable only to credit cards, or do they apply to other types of loans as well?
  

  Residual interest is specific to revolving credit accounts like credit cards. Other types of loans, such as fixed-rate installment loans, typically do not involve residual interest charges.

• How can I identify residual interest charges on my credit card statements?
  

  Residual interest charges can be listed separately or as part of the total outstanding amount on the subsequent statement following the payment.

  However, identifying residual interest charges on a credit card statement often requires scrutiny. Review your statements for any additional interest accrued since the last payment, even after paying off the statement balance.

• Do all credit card issuers charge residual interest in the same manner, or are there variations in how they calculate and apply these charges?
  

  The specific rules and processes for calculating and applying residual interest charges can vary between issuers.

  To understand how residual interest is handled by your issuer, refer to your cardholder agreement. Being aware of these variations can help you anticipate and manage residual interest charges more effectively.