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DEFINITION of 'Residual Interest'

1. A charge for borrowing money that accrues on a credit card account between the date the bill is issued and the date the cardholder pays the bill. Residual interest, also called "trailing interest," is only charged to consumers who carry a balance from month to month.

2. A type of interest payment received by investors in a real estate mortgage investment conduit (REMIC).

BREAKING DOWN 'Residual Interest'

1. Residual interest can confuse credit card customers who think they have paid their balances in full only to get a new bill for additional interest owed. Cardholders who do not carry a balance do not accrue residual interest; they receive a grace period between the time they receive their bills and the time they pay them. No interest accrues during the grace period.

2. REMIC investors receive residual interest payments after all the required regular interest has been paid to investors within higher priority tranches. Residual interest functions much like common shares in that preferred shareholders receive all required dividends before any amount remaining is divided among common shareholders.

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