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What is residual interest?
You may have heard the term residual interest, but not be sure what it actually means. If so, read on and we’ll explain all.
The cheapest way to use your credit card is to pay the balance on your statement off in full by the due date. If you do this then you won’t be charged any interest.
Residual interest comes in when you don’t pay your credit card balance off in full – if your credit card provider charges it. You may need to check the T&Cs of your card, or give your provider a ring and ask them.
The simplest way to explain residual interest is to give you an example:
- Month 1: Imagine that you make a purchase for £500 and decide to pay half of it off by the payment due date, leaving you with an outstanding balance of £250. In month 1 you’ll have no interest on your statement.
- Month 2: On your next statement, you’ll have interest on the remaining £250 balance from the date of the original transaction to the date on your statement. Let’s assume that you repay the £250 and the interest in full by the payment due date.
- Month 3: On your third statement, you won’t have any of the original £500 left as you’ve paid it all off. But, you will have interest on it from the date of your second statement until the date you made the payment. This is the residual interest. If you make a payment to clear it, no further interest will be added.
Avoiding residual interest
It may seem like common sense, but the most practical advice we can give you to avoid residual interest is to pay your monthly card balance off in full. If you follow this routine, you won’t be charged any interest (unless you take cash out at the ATM using your card).
You could also take out a credit card that has a zero per cent introductory rate, where there is absolutely no interest charged for a set period – in some cases up to 30 months. In this case, be mindful that zero per cent introductory rates are temporary offers. Be sure to make a note of the date that your interest free period ends, to ensure that the credit card balance is paid in full before the offer period is over.
If you are planning to pay off one or all your credit cards, you can avoid the residual interest trap by contacting your card issuer and requesting the full payoff amount, specifying the exact date that the payment will clear. The balance will include any interest up to the specified payment date. This will ensure that the balance is cleared in full including all the interest.
For more helpful advice on credit cards, hidden costs and money saving tips, check out our regular blog updates.