How to avoid residual interest

Young woman in a blue shirt looking at laptop to learn about residual interest on credit cardsImage: Young woman in a blue shirt looking at laptop to learn about residual interest on credit cards

In a Nutshell

Residual interest is the interest that can sometimes build when you’re carrying a balance without a grace period. Unless you pay your full balance on or before the exact statement closing date, residual interest can be charged for the days that pass between that date and the date your payment is actually received.
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You might think you paid your credit card balance off in full, but it’s possible residual interest charges might pop up on your next credit card bill.

Residual interest, sometimes called trailing interest, can be a tricky and frustrating part of using a credit card. Even if you think you’ve paid your balance off in full and you don’t make any other purchases, interest might show up on your next statement.

Some credit card issuers calculate interest on a daily basis, not just when your statement is generated — which means that you can accumulate interest on your account after the statement date but before the credit card company receives your payment.

Thankfully, it’s possible to avoid residual interest, but first you have to understand how a grace period works.

Grace periods

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

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

Heads-up, though: While most cards offer a grace period on purchases, not all do. It’s important to check your card’s terms and conditions to see if a grace period is available.

Do grace periods apply for all credit card transactions?

No. Grace periods typically cover only purchases and do not apply to cash advances. Interest generally starts accruing on cash advances immediately, and the cash advance APR may be different than your purchase APR.

How residual interest works

If you’re aware of how residual interest works and the ways it can pop up, you may be able to avoid getting stuck with residual interest charges.

First thing’s first: Paying off your statement balance, in full, by the due date is the No. 1 rule for avoiding interest. If you started the cycle with a zero balance, your statement balance is made up of all the new purchases you made during that month’s billing cycle. If you pay that balance in full by the due date (assuming your card has a grace period), you’re in the clear when it comes to interest on those purchases.

But say you pay only the minimum that month. In that case, the remainder of that statement balance you didn’t pay rolls over into next month’s statement balance. As a result, your grace period won’t apply on that rolled-over balance — or on any new purchases — and once your grace period is gone, residual interest can accrue.

How? Well, in this example if your credit card issuer calculates interest on a daily basis (and not all do), you can now accumulate interest on your balance right up until the day the credit card company actually receives your payment — even if you pay by the due date. Basically, your new statement balance doesn’t reflect the interest that accrues after the statement closing date. Confusing, right? Thankfully, you can avoid residual interest charges.

How to avoid residual interest charges

There are ways of avoiding residual interest. If your card has a grace period, you can maintain it — and avoid residual interest altogether — by paying off your monthly statement balance in full by the due date every month. If your credit card offers them, online access and bill pay make it easier than ever to know exactly what your statement balance is and to pay it off in time. Some folks even find it helpful to pay off their card multiple times throughout the month, as smaller payments can be easier to handle than one lump sum. Either way, maintaining your grace period means you shouldn’t have to pay any interest on new purchases at all — including residual interest.

Another way to avoid residual interest is to pay off the entire balance on your card before the statement closing date each month. This is key if you’re already carrying a balance and no longer have a grace period. So even if you’re already accruing interest on the balance, paying it off before the closing date saves you from accruing any residual interest on the balance between that closing date and the due date.  

Of course, this is all easier said than done. To help make sure you can pay at least your statement balance off in full each month and maintain your grace period, monitor your credit card balance regularly, not just when you receive your statement. And do your best to charge only purchases you know you’ll be able to comfortably pay off within your card’s grace period.

If you do get into a situation where your grace period has expired, work to reestablish your grace period as soon as possible.

How long does residual interest last?

Because residual interest accrues between your statement closing date and the date you make your payment, you may not know how much you’ll be charged in residual interest until you receive your next statement.

If you want to pay off your balance and any residual interest as soon as possible before your next statement closing date, you’ll need to call your credit card company to get an up-to-date amount that includes any residual interest since your statement date. Then, you can immediately pay that amount off. This requires making a payment over the phone or online rather than through the mail to make sure the payment posts immediately.

When making a payment to pay off your statement balance plus any residual interest, make sure you consider any fees for expedited payment. In particular, beware of the fees some issuers charge for making expedited payments over the phone with a live customer service representative.

Be aware of the time of day you make your payment. If it’s later than your card issuer’s payment deadline for the day, ask for the payoff amount for the next day. Then make the payment immediately so you don’t forget and so no additional residual interest accumulates after your payment posts.

Next steps

If you’ve been charged residual interest, do your best to pay it off in full as soon as you can so the interest accumulation will stop. And do your best to pay at least your statement balance in full before your grace period expires to avoid residual interest in the future.

If you don’t have a credit card that offers a grace period, consider finding one that does. If you need to build your credit in order to qualify for a card that offers a grace period, read our guide to building credit to learn more.

About the author: Lance Cothern is a freelance writer specializing in personal finance. His work has appeared on Business Insider, USA and his website, Lance holds a Bachelor of Business Administration in … Read more.