Today is the day you pay off the remaining balance on your credit card.
Congrats! But if you waited until you received your statement in the mail, you’ll have to fork over additional money beyond the balance listed before you’re free of the credit card company.
Why? Because of a little (or not so little) thing called residual interest.
Residual interest — aka trailing interest — is the amount of additional interest you accrue between the billing date and your payment. If you’re paying off a substantial balance in one final swoop, the interest tacked onto next month’s statement could come as a very unwelcome surprise.
And it could be particularly painful if you don’t bother opening the next month’s statement because you think the balance is already paid.
Here’s how you can avoid residual interest — and save yourself from handing over one more dollar than you absolutely need to.
What Is Residual Interest?
Read the fine print in your credit card statement (fun, right?), and you’ll notice a sentence that reads something like this: Paying your last statement balance may not pay your balance in full.
To understand how that’s possible, we need to first learn a few terms and how they apply to your credit card account:
- Billing cycle: The period of time between your credit card statements — typically around 30 days, depending on the issuer. If your billing cycle starts on the 15th of the month, for instance, it would likely end on the 14th of the next month.
- Account closing date: The last day of the billing cycle.
- Due date: The day the payment for the previous billing cycle is due. If anything less than the full amount is paid off by the due date, the leftover amount is charged interest and added to the next month’s billing cycle.
- Full payoff amount: The total amount that you owe, including accrued interest. If you carry a balance, this number will increase daily. (P.S. It’s different than the “current balance” you’ll see on your credit card statement — unless you pay off your balance every month.)
- Grace period: The period between the account closing date and your due date — a minimum of 21 days, if your credit card company offers it. If you pay your balance in full every month and don’t take out any cash advances, credit card issuers won’t charge interest on your purchases during this period. However, if you carry a balance from month to month, you lose that grace period on any portion of the balance you didn’t pay the previous month and are immediately charged interest on it.
What does this mean for you? Let’s say you’ve been paying down your credit card balance for a few months. You get the statement in the mail that says your current balance is $1,000 and you’re ready to pay it off. You go online to make the payment in full, but you schedule it for 10 days later because you’re waiting for pay day.
When you get next month’s statement, you’ll see that you were charged interest on that $1,000 for the 10 days between the account closing date and your payment (and probably a couple extra days for the time it took for the statement to arrive in the mail).
It might only be a few dollars, but if you don’t pay it, that amount will continue to accrue interest, you’ll get charged late fees and your credit score will take a hit for late (or no) payment.
How to Pay Off Residual Interest
The best way to avoid residual interest is to pay off your credit card balance every month. (If you’re new to the whole credit card thing, check out this guide for how to use a credit card without going into debt.)
However, if you’re close to paying off your card after previously carrying a balance, the best way to avoid residual interest is to call your credit card company. Ask for the full payoff amount as of the date the issuer will receive the payment — remember that could be a few days later than the date you send the payment.
Even if you plan to close the credit card, keep the account open for a couple months so you’ll continue receiving communications about any interest or fees you may owe.
If there’s any question whether the company will receive your payment later than the specified date (think: mail delivery or online payment delays), you might want to add a little extra money beyond the specified payoff amount. After all, it’s a lot easier to deal with overpayment than paying for another month of accruing interest.
And just to be sure, check your statement for at least the next two months to make sure you’re not still carrying a balance or were charged additional interest. At that point, you may commence your debt-free happy dance.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.