I Paid My Credit Card in Full But Now I Owe More. What’s Residual Interest?

Imagine finally paying off your credit card after carrying a balance for a good while. What a feeling, right?

Now imagine looking at your statement the month after that, ready to revel in the fact that it says you owe $0 — only to see that you still owe money. Residual interest, the bill says.

What is residual interest? And are credit cards allowed to do that after you’ve paid your balance in full?

That’s what a listener of the Clark Howard Podcast recently asked.

Why Is My Credit Card Company Charging Me ‘Residual Interest?’

Why is my credit card company charging me residual interest? And what is that?

That’s what a Clark listener wanted to know.

Asked Deborah in Ohio: “Clark, I was able to pay off one of my credit cards. I was so proud of myself until I got a bill the next month for a $63 interest fee. When I called, they told me it was residual interest.

“I argued with them that I paid my bill in full and that there shouldn’t be anything beyond that. Am I wrong, or is there a way out of this? What is residual interest?”

What Is Residual Interest?

Residual interest, sometimes called trailing interest, occurs when you carry a credit card balance from one month to the next.

Your billing statement closes. Your credit card company issues you a statement. Even if you eventually pay that statement in full, you continue to get charged interest from the day your creditor issued the statement until the day your payment clears.

The residual interest accrues after the statement gets issued. So it won’t appear until your next statement.

Calculating Residual Interest: An Example

Let’s say your credit card balance is $1,500 and your credit card interest rate is 20% APR. Last month’s billing cycle ended on March 15 and you paid your credit card in full on March 25.

Remember that credit cards compound interest daily. So whatever you owe on your statement, you’ll have incurred more interest in those 10 days.

To calculate the residual interest you’ll owe on those 10 days, take the 20% APR and divide it by 365 days. That’s 0.0548% interest per day.

Then multiply that number by your balance of $1,500. You get $0.822, or 82.2 cents. That’s how much additional interest you accrued each day between March 15 when your new billing cycle started and March 25 when your $1,500 payment cleared.

Multiply 82.2 cents by 10 days and you now owe $8.22 in residual interest.

It will show up on next month’s credit card statement.

If you assume your balance is $0 after paying off the balance, you may neglect to look at next month’s statement and miss the $8.22 you owe. That can result in late payment fees or even a missed payment that will show up on your credit report for years.

Clark recommends that you get paper statements for your credit cards and that you check them carefully every month.

Clark Explains Why Deborah Needs To Pay the $63

We can all empathize with Deborah, who worked hard to pay off her credit card balance only to find out she still owed some money.

Unfortunately, she does owe the $63.

“The way banks calculate interest on credit cards is infuriating to people who have been running a balance,” Clark says. “So yes, you owe that residual interest. Because they bill it after the fact.

“[To avoid that hassle], you can slightly overpay your final payment and then they will refund the difference to you. Just so you don’t get the kick in the teeth after you’ve worked so hard to pay off a bill that you think you’re done with and then, wait a minute, there’s one more bill.”

The main way to avoid residual interest on a credit card is to pay off your balance in full each month. But life doesn’t always work out that way. Many people have ongoing credit card debt at one point or another.

“So that is what happened and that is the way it works if there’s an ongoing open balance,” Clark says. “A credit card is a revolving charge. Every day a balance is outstanding, it is charged a daily interest fee. And that’s what that $63 is. So it is accurate. It’s ugly but it is accurate.

“But regardless, feel good about what you’ve done. You are gonna pay that $63 and you’re done, done with them. And that’ll feel good.”

Final Thoughts

If you’ve carried a credit card balance from one month to the next, you may not be free and clear when you get around to paying it off.

That’s because credit cards charge interest daily. So even if you pay the balance from your last statement in full, you may still owe residual interest when your current billing cycle ends.

It’s important to always check your credit card statements each month for many reasons. If you’re in that good habit, you’ll notice the residual interest charges the next month and be able to pay them off.

Pay off your balance in full each month and you will avoid trailing interest.