Definition and Example of Residual Interest
Residual interest, also known as “trailing interest,” is the interest that accrues when you carry a credit card balance from one month to the next. This interest continues to add up from the time your current billing statement ends until your next payment is posted.
Alternate name: Trailing interest
For instance, let’s say your billing statement ends on the first of the month, and you paid your credit card bill when it’s due on the seventh. Residual interest will continue building up during those six days. If you’re charged residual interest, try to pay it off in full as soon as possible. Doing this will stop the interest from continuing to accrue.
How Residual Interest Works
When you open a credit card, you have the option to make minimum payments every month. Many borrowers choose to pay their balance in full, however, to avoid paying interest charges. Even so, residual interest begins adding up after your billing statement ends—and continues until your lender posts your payment for the month. In those cases, you could unknowingly be getting hit with residual interest charges that you may not expect. To calculate the amount of residual interest you’ll owe, divide your annual percentage rate (APR) by the number of days in a year. For instance, if you have a 17% APR on your credit card, you’ll divide 17 by 365 and get 0.0465%. From there, you’ll multiply that percentage by your current balance on your card. So if you have a $2,000 balance, you’ll owe 93 cents in residual interest charges for each day your balance goes unpaid (0.0465% x $2,000 = $0.93). In this case, if your billing cycle begins on the first of the month and your $2,000 payment posts on the eleventh, you will be charged approximately $9.30 in resident interest for that 10-day gap. There are ways you can avoid residual interest charges. Some credit card companies offer a grace period between the end of the billing cycle and the date your payment is due. As long as you pay your balance in full for the month before that grace period ends, you won’t be charged any residual interest. If your credit card company doesn’t offer a grace period, your best bet is to pay your balance in full before the statement closing date. Paying off your balance early ensures you won’t accrue any residual interest after your billing cycle ends.
