What is a residual interest on credit cards?
Residual interest or trailing interest is the fine amount you are required to pay if you miss the timely payment of your credit card. Your credit card bill comes at the start of the month or within the first two weeks of the month, let’s say you receive it on 8 of a month. If you pay your bill on 15, you shall be entitled to pay the interest for the late payment of 7 days. It is known as residual payment.
Your credit card provider will attach these interests with your next monthly payment. It is important to know about residual interest and the ways to avoid it.
How does credit card residual interest work?
Before you know about a residual interest, you must know the factors by which residual it is calculated. Banks have these terms such as billing cycle, due date, a grace period, and a closing date for their credit card service. These factors influence your residual interest billing. Let’s have a quick look at them.
- The Billing cycle is the time frame between two payments. Usually, these last around one month.
- Due date is the last available date of your billing cycle.
- Some banks offer a grace period of around one month at first to pay. After this, your residual interest starts to add up.
- The closing date refers to the last day on which your billing cycle ends. It is different from the due date.
And now so you know the factors behind residual interest, here’s how it is calculated. Usually, your credit card company calculates your residual interest, and here’s how you can calculate it. The residual interest is calculated by taking 18% of your annual percentage rate APR.
Let’s take $1000 as your carried out amount which you paid after ten days. SO, 18% of the amount calculated for a year or 365 days would be 0.0493% or 49.3 cents.
So, the residual interest which you have to pay for ten days delay from the billing cycle would be $4.93.
The interest amount would vary according to different banks and other service charges imposed by it.
How to avoid residual interest?
Avoid residual interest on your credit cards by clearing your credit card balance every month. You need to contact your credit card provider and alert them that you are going to pay the full payment.
After paying the full amount in time, you might sometimes get some extra amount in your next monthly bill. It happens in most cases. Straightaway call your dealer or provider and resolve this issue. It is always better to be on the safer side.
Another method is to apply for credit cards that offer 0% interest for their new users. You can save some bucks in the first few months of the credit. It may be a short period, but you can start practicing early. You can easily avoid residual interest by paying your loan before the start of the next billing cycle.
How residual interest affects your credit score?
You think you have paid the entire amount listed by the bank and think you have $0 to pay. It is not happening in most cases. If you pay your loan late, the residual interest starts to add up on your next payment.
Usually, late credit card payments impact your credit score up to 35%, and this will single-handedly damage your credit score to a great extent. Your credit gets more damaged when you have residual interest on your loan. There are chances where the credit offers are reduced, or even none offered if your credit score is worse.
You may get penalty charges for late payments, and these are added along with your residual interest. When penalty charges are added to your account, your credit score is pretty much gone. Pay the loan within the due date, and you are free from interest and bad credit scores.
Conclusion:
Quick recap, residual interest is the amount you need to pay for the days delayed in paying the balance loan of yours. It shall be avoided if you have a grace period, and it’s ideal to check dates and to pay on time. Residual interest can do worse to your credit scores too, and that unnecessary money spent.
