Credit Card Interest - How does it work?

Hollypop_2

Hello All,

I am trying to build up my credit rating and have just recieved a credit card through from Vanquis with £250 limit.

I dont really understand how credit cards work. Please can someone explain the interest to me.

If i buy something today, how long do i have to pay it off before i am charged intrest or just by using it will i have gained some intrest or is is calculated daily?

Then if i wait till my statement date how long do you have to then pay the money on the statement? and will that include intrest even if my direct debit is set up to pay the balance off in full?

Your help would be much appriciated.

Many thanks
Holly :cool:

[Deleted User]

You'll have around 2-3 weeks from your statement date to make a payment. #

Interest is incurred daily on each transaction.

But - if you pay off in full, every month, by the due date specified, you won't pay any interest.

Hollypop_2

thankyou zx81 for that. So just to clarify.

I have today made a transaction for £200. It says my next statement is the 4th May 2011. and when i set up the aqccount i set up a direct debit to pay off in full, and he asked what date i get paid (25th) so am i correct in assuming the statememnt will come out on 4th and on 25th they will take a direct debit for the full amount and i wont be charged?

Or i take it i can just use my debit card to pay off the balance at any time even today and then no direct debit will be taken?

Grummy

Hollypop wrote: »

Hello All,

I am trying to build up my credit rating and have just recieved a credit card through from Vanquis with £250 limit.

I dont really understand how credit cards work. Please can someone explain the interest to me.

If i buy something today, how long do i have to pay it off before i am charged intrest or just by using it will i have gained some intrest or is is calculated daily?

Then if i wait till my statement date how long do you have to then pay the money on the statement? and will that include intrest even if my direct debit is set up to pay the balance off in full?

Your help would be much appriciated.

Many thanks
Holly :cool:

Hi Holly.

Different CC providers have different systems, but the basic idea is the same. If you buy something today, you have 28 days or a full month or however much time they tell you in which to pay it back in full, if you don't pay it back in that time, you will be charged interest.

The way the interest accrues is different for different providors. I worked for Bank of America, and the way they worked it was that, from the moment you make a purchase, you start being charged interest on a daily basis. If you paid off your charge in full before the 28 days, that interest was wiped off, if you went over that 28 day mark you were then charged for those 28 days.

It's not so much a case of you get 28 free days so much as you have 28 days to avoid the charge.

The difficult thing with interest accrued how Bank of America did it was that if you go over that 28 days, you are charged interest every day. So, let's say you go over your 28 days, you get your monthly statement and it says you have been charged £10 interest. That interest is only up until the date on the statement. It could be a week before you read that statement and in that time you will have accrued another 7 days of interest (£2.50 in this example) which you will have to pay. It won't show up until your next months statement, however you will still have been charged it and will still have to pay it, and remember, for every additonal day you would be charged the interest and it would keep going up. Also to note, when you use your card, you may think of it as an overall bill, but cc providers itemize your borrowing, they know how much you've spent on each transaction. This is important as your interest is accrued per item not on the overall amount you have used. At least, that's how it worked in Bank of America.

Also, with regards to paying your credit card, let's say you've gone over the 28 and days and are paying interest, your monthly statement will tell you a minimum amount you have to pay, this basically amounts to just paying off your interest and a small amount from your credit limit. Now, lets say you just pay the minimum amount every month for 6 months, and in that time you max out your card. If you then went to pay off a lump of your debt, you wouldn't be able to choose where the money goes (remember that providers itemize your spending) instead they pay off the lowest interest items first, then the lowest value (yes, in some cases you may have different interest rates on a card for different types of spending, in Bank of America, you often had a different interest rate for cash withdrawls than you did for simply spending on the card in a shop). They do this because if you have multiple transactions on your bill, they can keep the most valuable ones for as long as possible, keeping your interest charge as high as possible.

Another thing to remember is that having a good credit rating does not make you a good customer in the eyes of a bank or cc provider. People with the best credit ratings are often prompt with payment, pay in full regularly, things like that. Banks and cc providers don't like that, they WANT people to only pay the minimum every month because that's how they earn their money. People who pay their bill in full every month don't bring in revenue for the bank or cc provider. I mention this not to persuade you against paying your bill in full every month, but to let you know that even if you have a good credit rating, you won't likely get preferential treatment from a bank or cc provider.


I will qualify all this by saying, though, that it has been a couple of years since I worked for Bank of America, so there could be some changes I'm not aware of. Also, though this is how I was trained at BoA, it may not be exactly the same for other banks of CC providers.

Sorry for the long winded reply, it is a very detailed system and it is designed to look appealing to consumers, but really to give all the advantages to the bank/cc provider.


Edit: Holly, just read your Direct Debit question.

You have 2 different types of payments from your bank, a standing order and a direct debit. A standing order is something you set up to pay a specific amount at the exact same time every month, in this case you are sending money somewhere. A direct debit is set up to take out an amount you specify at the receivers disgression (in this case your cc provider) in this case, the receiver takes the funds (not quite that simple, but basically the case). The main difference is that Standing Orders go out at the exact same time every month sending the amount you have set up, it's a very rigid payment. Direct Debits are flexible. They go out at different times every month, but will always be paid in time, and you don't have to specifiy a figure to be paid, it can simply be set up to either pay a minimum or clear a balance, which is what you have done. With a Direct Debit set up you never have to worry about going over that 28 day limit. Each months statement you receive will tell you on it the payment due date, and on direct debit your payment will be cleared by then.

Edit2: Yes, you can pay back your bill earlier if you like you don't have to wait for the direct debit to go out. The good thing about a direct debit is that if you have paid it off earlier, it won't take any money from you, whereas a standing order would still send the payment. Also, you can't use a credit card to pay it's own bill. If you have 2 credit cards you can use them to pay each others bill, but you can't use your Vanquis card to pay your bill for your Vanquis card.

[Deleted User]

Hollypop wrote: »

thankyou zx81 for that. So just to clarify.

I have today made a transaction for £200. It says my next statement is the 4th May 2011. and when i set up the aqccount i set up a direct debit to pay off in full, and he asked what date i get paid (25th) so am i correct in assuming the statememnt will come out on 4th and on 25th they will take a direct debit for the full amount and i wont be charged?

Or i take it i can just use my debit card to pay off the balance at any time even today and then no direct debit will be taken?

As long as the payment due date is not before the 25th, then yes. I'm assuming that they've set the due date up for 25th to coincide with you getting paid, but check that.

Yes - you can pay at any time with your debit card - but some providers still take the DD as it was set up, regardless of other payments received. So you need to check that too. I'm not sure whether Vanquis do this or not.

elfen

I'm a Vanquis customer, and can confirm they still take the DD payment if you've paid the same amount, I've done it the past two months and the DD has still come out (minimum so I can overpay when I like)

Grummy

elfen wrote: »

I'm a Vanquis customer, and can confirm they still take the DD payment if you've paid the same amount, I've done it the past two months and the DD has still come out (minimum so I can overpay when I like)

Really?? The !!!!!!s. DD's aren't supposed to work that way. They must apply for payment immediately from sending out your statment or something.

When I worked for BoA the systems checked the state of each account a day or two prior to taking the DD payment, that gave people time to make payments of their own first.

Although, with that said, if your DD is set up to take a specific sum rather than just the minimum or full balance, then that amount would likely be paid anyway as if it were a standing order, it's just that the payment date would fluctuate every month.

dtsazza

Hollypop wrote: »

and when i set up the aqccount i set up a direct debit to pay off in full, and he asked what date i get paid (25th) so am i correct in assuming the statememnt will come out on 4th and on 25th they will take a direct debit for the full amount and i wont be charged?

The short answer that applies to this is - you're right, you won't be charged.

If you have a direct debit to pay off the account in full, then you'll always pay off every statement in full by its due date, and so will never have any balances that attract interest.