What You Need To Know About Credit Card Interest:Trailing Interest a.k.a Risidual Interest
My friend called me yelling that her credit card company was cheating her and that she was going to sue them. I looked at the phone wondering what in the world she was talking about. It turns out she is not being cheated. I didn’t think she was. I knew it had to be something that she didn’t really understand about her account. I was right. She emailed me six months of her statements trying to convince me that she was being cheated. I got it immediately. I know how it feels to pay bills and then see charges that you don’t think that you deserve. So here we go.
If you have never heard of trailing interest a.k.a. residual interest then you may have lucked out in some ways. My friend, like many other Americans, paid off her credit card when she received her income tax return. She called the company and asked what she needed to pay to get to a zero balance. That was a great first step, and she paid the total balance on the account. Well, the next month she received a bill that she owed another $13.28. She was livid because she hadn’t charged anything and she couldn’t figure out how she was being charged interest on zero balance.
Trailing interest is just what it sounds like. It trails from the time you make your purchase. Your statement closing date and payment due date are not on the same day, so there are a few days in between that allow interest to be accrued, so even if you pay the entire bill off, if you have not calculated the daily interest percentage and you have carried a balance for more than one billing cycle you may experience trailing interest. Most credit card companies can calculate the daily rate for you and tell you what you need to pay, but others may not allow you to overpay an account for a lot of different reasons.
Firstly, please always take note of your interest rate and understand that it is an annual rate, so you can multiply it by 12 and then divide it by the number of days in the month to get your daily interest rate. Typically you have a minimum of 25 days to pay your credit card bill from when your statement closes. That leads to the second thing that you should know, which is when your statement closes. Lastly, know when your bill is due each month. If you are not going to look online for your statement, then don’t get paperless statements. Instead, set your account for automatic billing, so that you do not forget to pay your credit card bill by the due date. Credit card companies make millions of dollars each year off late payments, if you can’t pay the entire bill then at least pay the minimum amount due by the due date or don’t use the card.
Your payment history and account usage are typically reported every 30 days, so if you are more than 30 days late then it is likely going to; number one be reported to the major credit bureaus, and number 2 kick starts your penalty interest. What? Yeah, most cards have a penalty interest that will kick in if you are late on your payment. So, not only are you getting a late fee, but you are also being charged a higher interest rate if you carry a balance.
Now you know, and my friend knows about trailing interest. My suggestions are as follows: Take some time to review your credit card accounts. Note your interest Keep track of your statement ending date Keep track of your statement closing date Set up autopay Know if a penalty interest exists on your account Ask if you qualify for a lower interest rate (Yes, you can ask for a lower interest rate) Keep your credit usage below 50% (some say 30, but 50 is good). Know if you have a variable or fixed interest rate (I will discuss this next time)
Credit Karma is a free credit monitoring app that you can download to help you keep track of your credit. Most credit cards also offer free FICO (credit score) viewing that is not a hit to your credit. You can also obtain your credit report once a year for free from all three major credit bureaus (you can always get a free credit report anytime you have been denied credit), maybe pull one every four months to take a look and see where you are. Your credit is worth the $30 it cost to pull the report if you have to pay for it.
Be financially savvy!