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How residual interest can keep you from a $0 balance

By  |  Published: April 7, 2017

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.
Ask Sally a question, or read her previous answers in the To Her Credit archive

Question Dear Sally,
Is this a thing? I have a card that I use for certain purchases that I usually pay in full the following month. I don't use it every month, just when I need it.

In January, I made a $400 charge that I planned to pay in full in February. An unexpected expense came up, so I only paid $200. Then I needed to put the $850 charge on the same card to repair my car, bringing the balance to $1,050. On February 18, I paid $550, leaving a $500 balance.

On March 18, the next due date, I paid the statement balance in full. On March 21, I received a statement showing a balance of $5.43. It was for interest charges on purchases. I did not understand why I was charged interest, when I paid in full by the due date.

I called my credit card company, and the customer service representative said that it was because part of the carryover from previous months was out of the grace period, but that he would waive the fees for me. I was glad of that, but if it was a legitimate charge, I would have paid it. On one hand, his explanation sort of made sense, but not really? Could you please explain it so that I can wrap my pea brain around this? Many thanks!  – Valerie

Answer

Dear Valerie,
You’ve run into what is called “residual interest” – and yes, it’s a thing. It can be confusing, and I agree that it does seem to go against how we expect grace period rules to work.

As irritating as it is to get a bill for interest after you’ve paid the amount on your last statement in full by the due date, the truth is that banks can charge you interest for the time between when they pay the merchant on your behalf and when you pay the bank, as long as they abide by the terms of your contract. Most credit card companies offer a “grace period” that allows you to pay your balance by the due date and pay no interest. Say you buy a laptop computer in February for $500, using a credit card on which you had paid off the balance the previous month. You get your statement and pay the balance in March. Thanks to the grace period, you were able to pay for your laptop weeks after you bought it. It’s like a short-term loan at no cost to you.

This free ride ends abruptly when the balance is not paid off every month, however. As you discovered, if you carry a balance one month, paying the statement balance the following month can cause some leftover interest charges to show up on your bill the month after. That’s because in the fine print of your contract, it says something to the effect that you can still be charged interest up to the date you actually pay the balance if you did not pay the balance in full the previous month. Credit card company contracts are not all exactly the same. Be sure to read your contract to understand the terms of your contract.

Credit card issuers must get a lot of calls about residual interest charges. I’m glad you called them and they took it off your bill this time. Carrying a balance can mess up the whole grace period deal, not just for one month but for the following month as well.

On the positive side, paying card balances off by the due date is a good financial habit. If the rules for residual interest charges help motivate us all to do so, every single month, they’re not all bad. Now you know, and they won’t take you by surprise again.

See related: How to use the grace period to avoid paying interest, 9 confusing credit card terms explained

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Updated: 08-18-2017

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