What Is Residual Interest?

It’s a good credit card habit to pay your bill on time and in full each month. But as you go through life, it’s also not uncommon to carry a balance from time to time. When this happens, you might see a charge on the following month’s statement, known as residual interest. Here’s more about what it is and what you can do to avoid it.

WHAT IS RESIDUAL INTEREST?

Residual interest, also known as trailing interest, occurs when you carry a credit card balance from month to month. From the time your statement is issued to when your credit card provider posts your payment, you’ll accrue residual interest. So if you’re carrying a balance at the start of your billing cycle on October 1 and make a payment on October 8, you’ll accrue residual interest for those seven days.

Even if you pay your statement balance in full, the residual interest charge won’t appear until your next statement. That’s why you might be surprised to see a charge the following month, after thinking you had paid your statement in full. If you’re not expecting it and assume your balance is zero, you could end up missing the residual interest charge the following month. Not only will the interest continue to accrue, but it could also result in late fees and ultimately damage your credit.

HOW TO AVOID RESIDUAL INTEREST

The best way to avoid being charged residual interest is to fully pay off your credit card bill before the due date every single month. But if you are carrying a balance month to month, you may want to consider contacting your lender and ask how much you owe in residual interest. This way, you’ll not only avoid more surprise charges, but you’ll also know for sure that you’re paying your future statements in full. You’ll also want to make sure to thoroughly check your statement each month so you know sooner rather than later if you have residual interest building up.

While your credit card company calculates residual interest automatically, it can also be a good idea to review your card agreement so you understand how these types of charges are applied to your account. You can also contact your lender and ask them to walk you through how residual interest works for your specific card.