Residual Interest – What You Need to Know

What is residual interest?

Residual interest, also called trailing interest, is interest that accrues on a balance between the end of a billing cycle and the date the issuer receives payment. Residual interest only builds up if you carry a balance from month to month because it’s applied to the balance carried over to the new billing cycle. 

Your credit card company will calculate the residual interest you may owe, and it begins from the date your statement was sent and ends when the bank receives your payment. 

If you start your billing cycle with a $0 balance, your statement balance is made up of all new purchases you make during that month’s billing cycle. If you pay off that balance in full by the due date, you’re in the clear when it comes to interest. However, if you only pay the minimum, the remainder of the balance you didn’t pay rolls into the next month’s statement balance, and residual interest can accrue. 

1. Example of residual interest

Say your billing cycle ends on the first of the month. You’ll receive a statement with the total amount you owe that month, including interest. In this example, say your statement balance plus interest is $800. You receive your statement, and then the issuer receives your payment of $800 on the due date three weeks later. 

However, during those 21 days, interest accrued on the unpaid balance. So, you may owe another $15 in interest, which would be applied to your next statement. 

Or, say your billing cycle closes on the 15th of every month. On July 15, your statement balance is $1,000. Your due date for the bill is August 14th, but at this time, you are only able to afford to pay $900, meaning you leave a balance of $100 on the credit card. This $100 will start accruing interest the next day. Now, say the next month you only charge $500 and you can pay off that balance plus the $100 from last month. You will also owe the accrued interest from the last month. 

How does residual interest work?

Credit card issuers send cardholders a statement after the closing date of each billing cycle stating how much is owed for that billing cycle. (A billing cycle is typically 30 days.) By law, the statement must be sent at least three weeks before 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. 

Interest continues to accrue daily on your unpaid balance during that time. So even after you’ve paid the full amount on your statement, you still have to pay the interest that accrued after your statement was sent. This amount is sent to your next statement. 

If you pay off your balance in full and on time each month and if your issuer grants you a grace period, you won’t be charged interest between the end of the billing cycle and the payment due date. 

If you carry a balance, you will owe residual interest for the days that pass between the statement closing date and the date your payment is received. 

How to avoid residual interest charges

The good news is there are several ways you can avoid residual interest charges:

1. Grace period

A grace period is a time between the end of your credit card’s billing cycle and the date your payment is due. As long as the grace period applies, interest won’t immediately accumulate on new purchases. 

Note that a grace period only applies if you pay off your entire statement balance by the due date each month. If you miss a payment or pay only part of the balance, the grace period expires and you’ll owe interest on the remaining balance and any new purchases you make. 

Not all cards offer a grace period on purchases, so check your card’s terms and conditions to learn more. 

2. Pay the full amount

Make sure to check your credit card statement from the previous month to see if you owe any residual interest. Then, you can pay the amount owed rather than just the previous statement’s balance. (The total amount owed will include the balance plus any additional accrued interest.)

3. Pay on time

Make sure you at least pay your bill on time, though paying your full balance a little early can help ensure there’s no balance to accrue residual interest. On the final day of your billing cycle, view your current total balance and pay that amount. 

4. Consider 0% APR

If you have a large credit card balance or multiple cards with balances, consider a balance transfer credit card with a 0% APR introductory period. During this period, typically at least 18 months, you won’t be charged any interest on an outstanding balance. This prevents your debt from growing while you work to pay it down, and will help you avoid residual interest charges and other fees.

Why is it important to track residual interest?

Residual interest means you owe more money on interest fees, and you also miss out on a grace period to avoid these charges altogether. These charges can easily be missed even if you thought you paid off your entire credit card balance, so they can continue to add up. 

It’s especially easy to miss them if you didn’t add new card purchases during a billing period. However, missing a charge could lead to a late payment, or even missed payment, which not only costs money but also can impact your credit score. 

How long does residual interest last?

If you accrue residual interest, it may take up to two consecutive statement periods to clear out those charges. 

However, you can get rid of it faster by contacting your card issuer and requesting your full payoff amount. (Since residual interest is charged each day, your full payoff amount will also change every day if your account goes unpaid.) The full payoff amount is the amount you can make toward your bill to fully pay off your account. 

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