“What is trailing interest and how do I avoid it?”
TFW when you make that final credit card payment to bring your balance to zero, and you get hit with another bill for interest!
What is “trailing interest”? I just got a credit card bill with interest charged after I paid it off!
Submitted by Sasha.
When you are using credit cards, timing is everything. The difference between the date you make a credit purchase and the date you pay can have a huge impact on the “cost of the money” you are borrowing from the credit card company. If you make a purchase and pay before the due date, you fall within the “grace period” for most cards, so you’ll usually pay nothing in interest! That is truly the financial ninja move we all want to practice because when you do this, you are using the credit card company’s money for free! The catch is, not all credit card companies offer a grace period and some begin accruing interest from the moment of purchase. There are a few things to note here so let’s break it down.
Trailing (or residual) interest is accrued from the time the bill was sent to you (the closing date) and when they receive your payment. If you pay the full current balance online immediately, you can avoid trailing interest.
If you carry a balance from on your credit cards, you will almost always end up paying trailing interest because it is accruing everyday (even if you aren’t making new purchases).
Know before you owe
Thinking about your credit card usage before you make a purchase can help you stay on track to pay in full before that interest hits. While it is best to read all of the terms of your credit card (yeah, we know they don’t make it easy), at a minimum read the fees, due dates, and grace period info to make sure you understand all of the costs and how to avoid them.
Pay attention to your “statement balance” and the “current balance” as any new purchases and interest will be reflected there. To avoid additional interest, pay the current balance in full. Often, paying the statement balance will avoid interest as any new charges fall into the new billing cycle (again, this depends on the card companies grace period policy).
Timing is everything and using credit cards for your regular monthly expenses can be a convenient way to manage money. Set a goal of using credit cards only when you know you can pay the balance in full.