How to calculate residual interest

Before we delve into the realms of residual interest calculations, let’s take a moment to get to grips with what it actually is.

What is residual interest?

Residual interest – sometimes referred to as trailing interest – is a charge incurred when you don’t pay your credit card balance off in full at the end of the month.

This interest builds up between the time your credit card bill is issued and your payment is received.

If your payment is received after your statement is sent, you could incur residual interest charges even if you pay your balance in full.

But not all credit card providers charge residual interest, so it may be worth checking the terms of your credit agreement to see if your provider does.

Residual interest maths

For the purpose of this example, let’s imagine you made a £400 purchase with your credit card at the beginning of November.

You decide to repay half of the balance – £200 – by your November credit card repayment date. You shouldn’t be charged any interest on the outstanding £200 in November’s credit card statement.

By December’s repayment date, you’re in a position to repay the remaining £200 to clear the original balance, so you do just that. Again, you would not be charged any interest in this credit card statement.

By your January statement, you’ve repaid the entire balance of your first £400 credit card transaction. However, in this third month you will be charged interest on the £200 that was outstanding from the first statement after your original purchase. This is the residual interest.

To clear this residual interest, you will need to repay the specified charges by the date of your next credit card statement. If you do not pay the residual interest by the following month, you will incur further residual interest on top of your original residual interest fee.

Once you have paid off the residual interest, you shouldn’t receive any additional charges.

How to avoid residual interest

The easiest way to avoid being charged residual interest is to set up a monthly direct debit to ensure your credit card balance is met in full each month. At the very least, you should may your minimum payment so your credit history isn’t affected – but this won’t help you avoid residual interest.

Another option could be to take out a credit card that offers a 0% introductory rate. This means you can avoid any sort of interest charges – including, of course, residual interest.

It’s important to remember that all 0% introductory rate credit card offers have an expiration date, and this will vary from card to card. Make a note of when this introductory period ends to avoid experiencing any unexpected charges.