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Why your credit card isn’t really paid off: How residual interest works

Thought you paid off your credit card balance but then got a new bill? Learn how residual interest, also known as trailing interest, works and how to avoid it.

Have you ever heard of residual interest? If not, you are almost certainly in the majority of the population. However, if you have one or more credit cards that you use on a regular basis – and carry balances from one month to the next – you are almost certainly paying residual interest.

Here’s the lowdown on this mystery credit card charge and a handy credit card interest calculator.

What is residual interest?

Have you ever received a credit card bill for finance charges the month after you thought you paid the balance off in full? That’s residual interest.

Residual interest, also known as ‘trailing interest,’ is the interest charged on a credit card balance that accumulates between the billing statement date and the date you pay the bill. Residual interest only applies if you carry a balance on a credit card from month to month.

While most common with credit cards, residual interest occurs on many different loan products – though it sometimes goes by a different name. For example, residual interest is the reason why the final payoff balance on a mortgage is typically higher than the balance as of a given date, or the balance that appears on an amortization schedule.

The mortgage lender will add interest to the loan principal balance through the date that the mortgage is paid in full. In the case of mortgages, this is generally referred to as “per diem interest charges.” Due to federal regulations, mortgage lenders must clearly spell these charges out to the borrower. For credit card customers, however, residual interest often comes as a surprise.

How residual interest hurts credit card holders

Residual interest is more than just an interesting mathematical calculation or a minor annoyance. It’s existence can actually hurt credit card holders in a number of ways.

If you assume that the “balance due” is the same as the payoff balance.

You fully intend to pay off a credit card balance entirely, so you do what anyone would do, and pay off the amount shown under “balance due.” But even if you do, you will still owe money for the interest charged between the date that the billing statement went out and the day that the lender received the payment. You think you’re done with your credit card debt, but you’re not done!

If you ignore a subsequent credit card bill.

Confident that you have paid off a credit card completely, you might disregard the billing statement that arrives the following month, assuming it shows a $0 balance. If you do, you might make a critical error and miss making the final payment. You may then incur a late charge as well as a delinquent payment entry on your credit report.

If you assume you have a grace period that doesn’t really exist.

It’s a common misconception among credit card holders that there is a grace period during which no interest will accrue on the account balance.

True, most credit cards have grace periods that allow cardholders to pay new charges in full interest-free. But grace periods only apply if you pay your balance off completely each and every month. There is no grace period for interest charges otherwise.

Why is residual interest a problem?

Residual interest isn’t necessarily an unfair practice – it’s just how lending money works: If you pay a balance in full at the exact time your bill is issued, there won’t be any residual interest. But most lenders give you a month or more to pay your bill after the statement date. The longer you wait, the more interest accrues that wasn’t included on your last bill. That residual interest will come next month.

The problem with residual interest is the fact that most cardholders don’t even know it exists – or when it applies.

So now you know. If you have carried a credit card balance and are making one last payment, be on the lookout for an additional bill for residual interest.

How to avoid residual interest

The most obvious way to avoid being charged residual interest is to pay off your credit card balance on a monthly basis. If you do, then you will actually get a grace period on interest charges, even if you use your credit card every month.

Another option is to use a credit card that offers a 0% introductory rate, where you can avoid interest of any sort entirely, including residual interest. If you go this route, just make sure that you understand that all 0% introductory rates are temporary. As such, be sure that you know exactly when the 0% period ends, so that you can make sure that the credit card balance is paid in full before the end of the final billing cycle.

And finally, if you are planning to pay off one or more credit cards, you can avoid the residual interest trap by contacting the credit card issuer and request the full payoff amount as of the date that you plan to actually make the payoff payment. That balance will include interest due through the date of payment, ensuring that your credit card balance will actually be paid in full.

Credit card interest calculator

We have a calculator to show you how much cumulative interest you’ll pay until the debt is repaid entirely, or how much interest you’ll pay within a specific repayment period. You can use our credit card interest calculator to test out different repayment scenarios and to see how much you’ll potentially save by making higher monthly payments.

  1. Start by entering your current credit card balance and current credit card APR.
  2. Choose to either calculate by average monthly payment or calculate by months to pay off.
  3. Hit calculate and the calculator will provide the total credit card interest charges you’ll pay between now and the time the card is paid off or determine the interest you’ll pay within a specific time period, depending on your prior selection.

The bottom line

Understanding how interest charged works, particularly on credit cards, is the key to knowing how to properly access debt and know what you’re paying. That includes learning how residual interest works and how cumulative interest can stack up as you work on repayment.

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