How Credit Card Companies charge Interest

griff893

My Mum has an M&S credit card and recently had a statement with £453.01 on it and only paid £271 of the balance off and the credit card company still charged her interest on the whole £453.01 instead of what was left, is this legal? Do all credit cards charge this way? Personally I think its daylight robbery and if I can do anything about it then I would be interested to hear from anyone with suggestions.

Many thanks
Griff893

PBA

You get charged interest from the date of the transaction until the date it's paid off. So she's getting charged on the full amount until the date she paid the 271, then only paying interest on the remainder of the balance after that. She's not being charged for money she hasn't borrowed, so there's no "daylight robbery" going on.

Rich_Richmond

There are the three main ways that credit card companies figure your interest charges: average daily balance, adjusted balance and previous balance.

Average daily balance
This is, by far, the most common way that credit card companies figure your interest charges. Every day, your charges and payments are tallied. At the end of the month, an average is figured. For a typical 30-day billing cycle, here is simplified version of how it might work: You have $200 for your balance for the first 25 days. Then you charge $900 on the 26th day for a big ticket item. You balance would be figured this way. The first 25 days saw a balance of $200 each day, so you would take 25 x 200 = 5,000. For the last 5 days of the month, your average balance each day was $1,100 ($900 for the new charge plus the $200 you already had). So, 5 x 1,100 = 5,500. Add the two numbers together and divide by 30 to get the average daily balance for the whole month: 5,000 + 5,500 = 10,500. 10,500/30 = $350. The interest charges would be figured using that $350 as a base.

Adjusted balance
This almost never happens. Why? Because it gives you an advantage in terms of your credit card payments. The company uses, as a starting point for the month, your balance from the previous month. All charges are added from the month, and all payments are subtracted. So if you start with a $500 balance, and charge $300 to your card, but you have made a payment of $400, your adjusted balance is $400. Your yearly interest rate is divided by 12 and multiplied by the $400 to get your interest charges for the month.

Previous balance
This system is as simple as the adjusted balance to figure, but previous balance usually favors the credit card companies. Basically, the credit card company takes whatever your balance is at the end of the month and uses that to figure your monthly interest charges.

You need to be sure that what is the type of interest that your bank is charging you.