Don't get caught out like I did!

Backbiter

A word of advice to anyone who's recently done a 0% BT.

I've done loads of these in recent years, and I'm well aware of all the dos and don'ts, especially the rule that you never spent on a card you've just BT'd to, due to the old 'payments hierarchy'. That meant that all payments went to the amount on zero interest, leaving you to incur hefty interest on your subsequent spending until you'd cleared the amount on 0%.

I was delighted when the rules changed, but I'd never been caught out by the old rules anyway.

A couple of months ago I had to buy some flights for work, costing nearly £3000. I naively assumed that the new rules on payments meant I could use a card that was carrying a small amount on 0%, as I'd be clearing the full £3000 iin full by the next statement.

When my statement arrived, I discovered that I'd been charged interest from the date of the purchase of the flights - quite a hefty sum. There was no 56-day interest free period as I was carrying a balance, even though this was a 0% balance.

I just wanted to warn anyone else against making my costly mistake.

chexum

You just confirmed my suspicion that "paying the balance in full" is indeed requires payment for the whole balance, there's no virtual balance for BT and purchases that they consider separate:

See #10 in:
https://forums.moneysavingexpert.com/discussion/3115030

Backbiter

Yes, chexum, you're right. Even though my card was an MBNA card, I'm sure it's a feature of all cards.

Hax

Nice heads up post. Just to add though, even if the whole balance had been paid in full (including the 0% balance), the new transaction would have still incurred interest from the date of the transaction until the date it was paid.

Degenerate

Hax wrote: »

Nice heads up post. Just to add though, even if the whole balance had been paid in full (including the 0% balance), the new transaction would have still incurred interest from the date of the transaction until the date it was paid.

I don't think this is correct.

Regarding the OP, I had just about figured this out for myself but it's nice to have confirmation. I think that there is another tricky effect with the application of payments that also should be born in mind. From studying the T&Cs of my Halifax Clarity card (and I presume others are the same), it seems that although payments are applied to the highest interest rate first, there is still an effect that counteracts this in some circumstances. The payments are applied to the last statement before they are applied to any recent transactions. So if, for example, one were to use the card for a cash withdrawal and then pay off the cash sum immediately in an attempt to avoid the interest on the cash, the payment would instead be applied to whatever was outstanding on the last statement. Therefore, to truly pay off the cash withdrawal one would need to clear the last statement (forfeiting any remaining interest free period) then pay the cash sum on top.

chattychappy

Yep.. in fact this has been discussed before (can't be bothered to look up the thread).

In fact it gets worse - because some CC apply payments to statemented balances before unstatemented balances. So:

5JAN BT - £10,000, 0% APR
1FEB Statement - shows £10,000 + any fee, minimum payment (say) £100
9FEB Normal purchase - £50
10FEB Make payment £100
1MAR Statement - shows 3 weeks' interest on purchase

You might assume that your payment on 10FEB will be applied to the purchase first since interest is running on this at the standard rate. On this basis you would only 1 day's interest. In fact you will pay 3 weeks' interest and interest will continue to run until payment the following month.

Despite this, it can still be worth mixing standard and promotional balances, particularly at the start of a promotional period. (Because in exchange for up to 4 weeks interest, payments will be applied to those thus allowing your promotional balance to run at a higher level during the promotional period.) It depends on what else is going on with your finances.

TWO TIPS: 1) it is well worth considering making your monthly payment just after the statement date to reduce the period for which full-rate interest runs. 2) If you are considering a large purchase, try to make it just before a statement date. This could save significant interest.

Hax

Degenerate wrote: »

I don't think this is correct.

My understanding is that as you are already carrying a balance on your card (albeit one with a 0% rate) you essentially forfeit any 56-day interest free period (which is usually conditional on the previous and current month's balance being cleared in full) and additional purchases are treated in the same way as if you were carrying a normal balance on the card in that you are charged interest from the point of transaction to point of clearing the balance.

Backbiter

Hax wrote: »

My understanding is that as you are already carrying a balance on your card (albeit one with a 0% rate) you essentially forfeit any 56-day interest free period (which is usually conditional on the previous and current month's balance being cleared in full) and additional purchases are treated in the same way as if you were carrying a normal balance on the card in that you are charged interest from the point of transaction to point of clearing the balance.

I think that's correct.

Degenerate

Hax wrote: »

My understanding is that as you are already carrying a balance on your card (albeit one with a 0% rate) you essentially forfeit any 56-day interest free period (which is usually conditional on the previous and current month's balance being cleared in full) and additional purchases are treated in the same way as if you were carrying a normal balance on the card in that you are charged interest from the point of transaction to point of clearing the balance.

The interest free period is conditional on the full statement balance being cleared by the due date, with no reference to the previous one. It only applies to the purchases made in statement month, not the carried over balance, so there will be some interest, but not on the recent transactions. Likewise there will be another month of trailing interest generated by the carried balance.

Hax

Degenerate wrote: »

The interest free period is conditional on the full statement balance being cleared by the due date, with no reference to the previous one. It only applies to the purchases made in statement month, not the carried over balance, so there will be some interest, but not on the recent transactions. Likewise there will be another month of trailing interest generated by the carried balance.

If the balance from the previous month has NOT been cleared in full, then you are carrying a balance (irrespective of the interest applied to that balance) and interest is charged from the point the transaction is made to the point of clearing it. So, when the next statement is made, is contains the balance of that 0% "lump", the new transactions PLUS the interest applied to those new transactions up to the statement date.

This is lifted from the MBNA terms and conditions(found here):

Interest free period
• Maximum 50 days on purchases only, if you pay your statement balance in full and on time every month.

Interest charging information
You will not pay interest on new purchases if:
• your previous statement was paid in full and on time; and
• you pay your current statement in full and on time.
Otherwise the period over which interest is charged is as follows.

From
All transactions date debited to your account paid in full

Until
If interest is payable, the minimum charge will be £1

So, clear reference to the previous month's statement (for MBNA anyway - but I believe most (if not all) work this way).

Degenerate

I stand corrected, just checked another cards T&Cs and they do indeed do the same. I swear they've snuck that little caveat in at some point in the last few years though, it wasn't always the case.