It may feel unfair, but it’s legal: even after you’ve paid off your credit card debt, you may still owe money in interest.
Residual interest — sometimes called “trailing interest” — accrues between the end of your previous billing cycle and when your payment is received. In other words, it’s the interest charged on your outstanding balance between getting your bill and when the issuer receives payment for the bill.
If you pay your bill in full each month, you won’t see these charges (residual interest only occurs when you carry a credit card balance). Typically, cardholders that don’t carry a balance receive a grace period in which interest is not charged between the end of a billing cycle and when the payment is accepted.
Residual interest is charged to your account once you begin a new billing cycle while carrying a balance. For example, if you don’t pay $100 of your credit card balance one month, the following billing cycle you will accumulate residual interest on that $100 carried balance.
The hidden risk of residual interest
You may think you’ve completely paid off your debt until this charge pops up in your account. That’s the problem with residual interest — many people don’t notice the charges right away, if ever.
Considering this interest charge is tied to not paying your balance in full, your credit score will already be in a vulnerable spot (payment history comprises 35 percent of your credit score). If residual interest goes completely unnoticed, your credit score could take an even greater hit.
Beat residual interest to the punch
If you received a bill for residual interest, your only choice is to go ahead and pay it (in most cases, your residual interest charges will stop after two back-to-back billing cycles of paying your balance in full). But to avoid being surprised by this fee in the future, here are a few steps you can take:
If you’re looking to pay off credit card debt…
Should you have credit card debt and haven’t started the payoff process yet, you may want to consider a balance transfer or zero percent APR card. These cards offer an introductory period for a number of months in which you won’t be charged any kind of interest, including residual interest.
If you transfer your debt to the BankAmericard® credit card, for example, you’ll have 18 billing cycles to pay off your balance without accruing additional interest (so long as you make your balance transfer within the first 60 days). Keep in mind you’ll also owe a 3 percent balance transfer fee (minimum $10).
Bankrate’s credit card payoff calculator helps you determine how much you’ll pay each month by taking into account your card’s balance, interest rate and desired months to pay off. You can also use this tool to test out the payoff timeline of any zero percent APR cards you’re interested in.
If you’re about to complete your debt payoff…
To avoid accumulating extra charges after your scheduled debt payoff date, check your statement from the previous month to see if you owe anything in residual interest.
You can also do so by logging into your online account on the final day of your billing cycle, viewing your current balance and paying that amount. For further information, read through your card’s terms and conditions.
A third option is calling your issuer a few days beforehand to receive an estimate on what you’ll owe. Then, you can prepare your finances accordingly.
The bottom line
Residual interest can be a tricky aspect of owning a credit card, but half the battle is being aware of it.
It’s always best to try and pay off your balance in full each month, but if you do find yourself in debt, remember these tips:
- Consider a credit card that offers a long zero percent APR intro period. This will give you time to pay off your debt without accruing charges like residual interest.
- Keep on top of your credit card statements and regularly monitor your account for additional charges.
- Contact your issuer before your payment due date for an estimate on what you’ll owe in residual interest. From there, you can plan for the payment.