According to the Federal Reserve, the average credit card APR is about 16% — an amount that can significantly impact your budget if you can’t pay off your credit card balance in full each month. In fact, allowing even $1 of your statement balance to roll over into your new billing cycle can activate residual interest.
Credit card residual interest is interest that builds up between when your billing cycle ends and when the issuer actually receives your payment. Read on to learn more about what is residual interest, when it may apply, and how you can avoid it.
What Is Credit Card Residual Interest?
Residual interest, also called “trailing interest,” is one of the ways credit card companies make money. It’s a finance charge that’s applied to any balance that is carried over to the new billing cycle. The charges begin from the date your statement was sent and until the bank receives your credit card payment.
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How Credit Card Residual Interest Works
If you thought you paid your last credit card bill in full, you might be surprised to see a residual interest charge on your next statement. However, this might come up if you’ve kept a rolling balance on your credit card, meaning you’ve carried an unpaid portion of your credit card balance from month to month.
Some credit card issuers charge interest based on a daily periodic rate. To calculate your daily periodic rate, the issuer divides your APR by 360 or 365 days. Then, it adds the result to your daily balance.
Here’s where credit card rules around interest get tricky. Your card issuer is required by law to provide you with your billing statement at least 21 days before your credit card payment due date. If you always make on-time full payments, your card issuer typically won’t charge interest during this “grace period.”
However, if you’ve been rolling over a balance to your new statement, trailing interest on the old charges are applied. You’ll also lose your grace period for new purchases made during the billing cycle so interest charges accrue immediately. Each day that the balance goes unpaid, the residual interest compounds.
Since this residual interest is added during the days after your billing statement was sent, they can feel like unexpected credit card charges on your next billing period despite making the “full” payment the prior month.
Do All Credit Cards Charge Residual Interest?
Generally, the practice of charging residual interest is common across credit card companies. However, how and when it charges trailing interest varies between issuers.
If you’re unsure how your card issuer handles this type of interest charge, review your credit card agreement or contact your issuer directly to learn more about its terms.
Why Is It Important to Keep Track of Residual Interest?
Residual interest can impact your finances in many ways. For starters, you’ll owe more money on interest fees and miss out on a grace period. Additionally, a residual interest charge can easily slip past your radar if you thought you’ve zeroed-out your credit card balance.
If you didn’t add new card purchases during a billing period, you might not even look at your new statement and can easily miss a residual interest charge. This seemingly small issue can snowball into a late payment — or worse, a missed payment — that adversely affects your credit score.
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Tips for Avoiding Credit Card Residual Interest
To avoid this costly mistake, make sure you’re practicing smart habits when using a credit card.
Making the Full Payoff Amount
Given how credit cards work, the best way to know your card’s true outstanding balance is to directly ask your credit card issuer for your “full payoff amount.” Since residual interest is charged daily, your full payoff amount will change each day your account goes unpaid.
On the day you’re ready to make your credit card payment, contact the phone number on the back of your credit card. Ask the associate on the other line for your full payoff amount to date. This is the payment amount you can make toward your bill to fully pay your account.
Paying Your Bills on Time
If you haven’t carried a balance between statements and your credit card offers a grace period, making a payment for the full statement balance by the due date is enough to prevent residual interest. This can also help you maintain your grace period.
If you’ve already rolled over a balance, pay off your total account balance before the billing cycle closes. This can help you avoid trailing interest charges that start between the date your statement is sent and when the bank receives your payment.
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Considering a Balance Transfer to a 0% APR Card
A 0% APR balance transfer card can be a useful tool, if you have a balance that’s too large to pay off early or in one fell swoop. Balance transfer cards effectively allow you to pay a credit card statement with another credit card by transferring the prior balance onto the new card at no interest.
Keep in mind that the promotional interest rate is only valid for a short period of time. For example, the transferred amount might incur no interest for six month or a year, depending on the balance transfer terms. After that, the standard interest rate will apply.
When considering this strategy, make sure you weigh the pros and cons of a balance transfer card, such as the cost of a balance transfer fee. This fee might be a fixed dollar amount or a percentage of the amount you’re transferring. Always do the math to ensure that the amount you’ll save on residual interest from your original card outweighs the balance transfer fees.
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How Long Does Credit Card Residual Interest Last?
Typically, if you’re hit with residual interest, it might take about two consecutive statement periods to clear out residual interest charges. However, you can get rid of residual interest faster by contacting your card issuer to request your full payoff amount.
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The Takeaway
Carrying a balance into a new statement results in losing your interest-free grace period on all purchases shown on that statement. You’ll owe residual interest on purchases carried over from the previous cycle, and you’ll also be charged interest immediately on new purchases made within the new billing cycle.
Avoid getting trapped by residual interest credit card charges by always paying your entire statement balance in full. By doing so, you can avoid paying more interest on your credit card purchases.
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FAQ
What is credit card residual interest?
Residual interest is the interest that’s charged on purchases you’ve rolled over from one statement into the next. It starts accruing the day after your new billing cycle begins to the date when the bank receives your payment.
Do all credit cards charge residual interest?
Yes, most credit cards charge residual interest when you carry over a balance between billing statements. However, when and how your card issuer applies residual interest can vary; check your card’s terms of agreement to learn more.
How can I pay off residual interest?
If you see a residual interest charge on your credit card statement, the best way to pay it off is by making a payment for the full payoff amount, rather than just the statement balance. This helps you capture daily trailing interest charges as of the day you plan on making a payment.
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