What Is Residual Interest?
4 Min Read | Published: August 30, 2024
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Learn how residual interest accrues on credit card accounts. See how it works and steps you can take to reduce residual interest to avoid unexpected fees.
At-A-Glance
- Residual interest is interest that accrues daily between the window of time after your statement is issued and your payment is made.
- The best way to avoid residual interest is to always pay off your full credit card balance on time every month.
- If you haven’t been paying off your card’s balance each month, and you want to pay off your balance plus any residual interest, you can contact your credit card issuer or bank and get a current amount from them.
Paying off your entire credit card balance each month is a great way to reduce your interest charges. However, even if you’ve paid the figure shown on your credit card bill, you might be surprised to find that you have interest charges still appearing on the following month’s bill. These charges could be due to something that’s called residual interest. In this article, we’ll look at how residual interest works and what you can do to help prevent it from occurring.
What Is Residual Interest?
Residual interest, also known as trailing interest, is interest that accrues daily between the window of time after your statement is issued and your payment is made.
During the window of time between when your statement is issued and when it gets to you and you make a payment, you may be charged interest each day based on your card’s annual percentage rate (APR).1
This means that even if you’ve paid your current balance as shown on your statement, the charge could appear on your next statement.
How Residual Interest Works
Let’s break down how residual interest works. Let’s say you had a credit card balance that you carried into the next month’s statement. In this case, you’d want to divide your APR by the number of days in the year, so 365. Let’s say for this example that your card has a 16% interest rate and your balance is $500. In this case, you’ll take 16% and divide it by 365 = .000438. Now, multiply this by your balance, the result is 0.22, or 22 cents. That’s how much interest you’re likely to accrue each day your balance goes unpaid.
Note that the actual interest that you may owe could vary as it may be calculated, and compounded, daily. This can give you an idea of what you may be able to expect, however.
If you pay the statement balance between the closing date and the due date, you could still have several days of residual interest due. You’ll be charged additional interest until it’s paid off.
However, there are ways that you can avoid residual interest.
How to Avoid Residual Interest
Some credit cards have grace periods, which is the window time between the end of the card’s billing cycle and its due date.2 If you have a grace period, interest won’t immediately start to accrue on most purchases (but some transactions may be exempt from this grace period, including balance transfers and cash advances). However, not all cards have grace periods, and grace periods typically only apply if you’re paying off your entire statement balance on time each month. Making late payments or partial payments could cause the grace period to expire, which means you’ll owe interest on the balance and any new purchases.3
The best way to avoid residual interest is to pay off your credit card balance in full and on time every month. If you pay your balance in full by the due date, and your card has a grace period, you shouldn’t owe interest on purchases made during the billing cycle.
But if you’re only making the minimum payment, then the rest of your balance will roll over to the next month. The grace period (if your card has one) won’t apply to this balance, and once the grace period ends, residual interest can occur.
If you haven’t been paying off your card’s balance each month, and you want to pay off your balance plus any residual interest, you can contact your credit card issuer or bank and get a current amount that includes all residual interest since your statement date. You can then make a payment online or over the phone and pay the balance off completely.
If you find that you’re having difficulty paying your full balance each month, review your monthly budget for ways you can cut spending. You could also see about changing your due date to align with paydays and other payment due dates.
If you’d like to pause interest from accumulating for a set period of time, you may want to consider a 0% intro APR credit card. With these cards, you’ll typically be able to avoid interest on most purchases for a preset period of time, as long as you make at least the minimum payment on time each month.
Frequently Asked Questions
It may take two consecutive statement periods to eliminate residual interest charges completely. You can do it faster by contacting your credit card issuer to get the exact amount for a full payoff before you submit your payment.4
The Takeaway
Residual interest happens when you carry a credit card balance into the next month and it accumulates between the time your statement is issued and your payment goes through.
However, there are steps that you can take to help prevent it from occurring.
1 “How And When Is Credit Card Interest Charged?,” Forbes Advisor
2,3 “How to avoid residual interest,” Credit Karma
4 “Credit Card Residual Interest: Tips for Avoiding Fees,” SoFi
Kevin D. Flynn is a financial services provider, business coach, and financial writer. He lives in Leominster, Massachusetts, with his wife Evelyn, two cats, and ten wonderful grandchildren.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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