Barclaycard charging incorrect interest?

Consumerist

From the Barclaycard website

How is my interest calculated?

If you can't pay in full by the due date, you'll be charged interest based on an Average Daily Balance on your account. We work this out by adding up the outstanding balance on your account each day and dividing this by the number of days in the month. Our minimum interest charge is £1.

It seems to me that the above explanation could not be plainer and is entirely consistent with the method you are using - you calculate the same thing more efficiently. The interest charge on any statement is based solely on the Average Daily Balance over that statement period. Nothing else.

Edit
If the Monthly Interest Charge = (Average Daily Balance) x (Monthly Interst Rate)
then you can re-arrange this to state that
Average Daily Balance = (Monthly Interest Charge) / (Monthly Interest Rate)

The Average Daily Balance should be the same whether calculated (a) according to the method stated on the Barclaycard website or (b) from the interest actually charged using the re-arranged expression above.

If there is a difference then I would say you need an explanation from Barclaycard. . . or you need to tell me where my reasoning is wrong (Please be gentle, I'm only trying to help).

Edit2
I don't suppose you could either post or PM a list of transaction dates and amounts for a particular month so that we could both do a calculation independently of each other and then compare results ?

Could you confirm the monthly interest rate used; I make 13.9% pa equivalent to 1.0905% per month.

throughtherain

I really think CC companies need to make it much clearer how they arrive at their interest calculations. I have a good maths degree and a logical mind and I have found it very confusing trying to calculate how much interest I should pay, not to check the bank's working, but so I can budget accurately and work out what the interest will be in the future if I pay off different amounts. Even doing the 'average daily average' as above I still come out with a value of interest they should charge which is higher than the actual rate.

Also could someone explain to me how the APR converts into the rate they charge monthly? I cannot get it to work out! Thanks.

Consumerist

throughtherain wrote: »

Also could someone explain to me how the APR converts into the rate they charge monthly?

The 12th root of (1 + (APR% / 100 ) ) gives (1 + (monthly rate% / 100 ) )

e.g. 20% APR works out as: (1.2) ^ (1/12) = 1.01531 i.e. a quoted monthly rate of 1.531%.

Edit
More accurately, for a 30-day month it would strictly be (1.2) ^ (30/365) = 1 + (monthly rate% / 100)

Hope this helps.

chattychappy

Consumerist wrote: »

The 12th root of (1 + (APR% / 100 ) ) gives (1 + (monthly rate% / 100 ) )

e.g. 20% APR works out as: (1.2) ^ (1/12) = 1.01531 i.e. a quoted monthly rate of 1.531%.

Edit
More accurately, for a 30-day month it would strictly be (1.2) ^ (30/365) = 1 + (monthly rate% / 100)

Hope this helps.

Yep. The calculator on Windows does roots. Change the "view" to "scientific" and used x^y. Use brackets as described above.

throughtherain

Thanks, that's brilliant. Done the relevant calculations for my Barclaycard, but it's 3 thoustandths out - I know this is a tiny amount but want to get it right. Is the monthly rate adjusted depending on how many days there are in the month?

Sorry if I'm being stupid!

klint

Hi Consumerist,

In answer to your earlier question, I confirm that the actual, or official, rate that Barclaycard uses (for my account at least) is 1.094% per month (as mentioned in my initial post.)

This translates to 13.9474 but the authorities unfortunately allow banks to round their advertised rates to one decimal place. So when you see rates advertised as 13.9%, it could be as much as 13.9499999% (practically 13.95%.) Whenever I write or call banks, I quote their own rates to 2 decimal places just to show them that I'm not a mug.

Their letter showing their calculation contained too many transactions during October for me to type up but if I get a chance I will (or maybe download them from the online banking site) and PM you. But for now, I'll just explain that the method they used in the letter is different from that quoted in their T&Cs. They take each individual transaction value and multiply it by the number of days between transaction date and the statement date, reaching a seemingly meaningless figure such as £10,000 for a transaction of £500 made twenty days before the statement date. They then add up all of these values, and divide by the number of days between statements (29 in this case).

Consumerist

klint wrote: »

But for now, I'll just explain that the method they used in the letter is different from that quoted in their T&Cs. They take each individual transaction value and multiply it by the number of days between transaction date and the statement date, . . .

Ok. It's kinda "vertical addition" instead of kinda "horizontal addition" and should give the same result (I think - but will get back to you on that).

The salient point here is that, except for the balance B/Fwd from the previous statement, all transactions in the calculation of the Average Daily Balance should be within the same statement period. An earlier post suggested that transactions from previous months had been brought in to the calculation. I may have misunderstood, however, so perhaps you would clarify.

Consumerist

throughtherain wrote: »

Thanks, that's brilliant. Done the relevant calculations for my Barclaycard, but it's 3 thoustandths out - I know this is a tiny amount but want to get it right. Is the monthly rate adjusted depending on how many days there are in the month?
Sorry if I'm being stupid!

If your interest is charged on the basis of your Average Daily Balance over each statement month, then the monthly rate will be fixed but the number of days used for the average will change according to the number of days between successive statement dates.

If, however, you are charged interest on the daily balance, which is the basis used by most credit cards, then the interest chargeable each day will be based on the 365th root of the APR. I would say that you really need a spreadsheet to perform this kind of calculation each month.

You are being inquisitive, not stupid. The murky world of banking is based largely on smoke and mirrors rather than, as in the world of pure maths, on the rules of sound logic.

Hope this has helped. The "Thanks" button looks like this:

throughtherain

I have clicked the thanks button - thank you for introducting it to me, I wasn't aware a written 'thanks' was inadequate.

I have set myself up a spreadsheet to do the calculations, more out of interest than any practical use - I can predict interest and min payments closely enough for my own financial planning.

Agree with the lack of clarity with how things are calculated - CC companies should be more explicit with their calculations. I am a Pure Mathematician by trade and so do prefer when I can get the calculations to work!

Many thanks again.

Consumerist

throughtherain wrote: »

I wasn't aware a written 'thanks' was inadequate.

And, of course it isn't. But it can save another posting just to say "thanks" when your done. No offence intended. :beer: