'Have credit card companies stopped charging interest on interest?' blog discussion

Former_MSE_Helen

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "Have credit card companies stopped charging interest on interest?" Blog.

Please click 'post reply' to discuss below.

Soapy955

i had been paying off my credit card for sometime but never clearing the balance. When it got a low enough balance to clear the account I paid the amount outstanding on the statement and thought that would be it.
I received a new credit card bill a month later fro a tiny amount which they claimed was the interest acrued between sending out my bill the previous month, and the time i paid it! I had paid it beofre the date they stated it needed to be paid by yet they still insisted I had to pay the extra interest!
Views on this please??

JimmyTheWig

Hmmm, interesting.

Clearly if you graphed (as I'm sure you've done, Martin!) the balance and repayments it would look like compound interest. [And if it looks like a duck, etc.]

Would it be reasonable to word it in a way that if you only make small repayments each month then you won't be doing much more than paying off the interest each month and the total amount you repay will spiral? And maybe give a few concrete examples?
But it's not the same as describing it as compound interest, which it is. Very difficult.


Presumably, in any case, they haven't stopped charging interest on the interest?
If you miss a repayment then you will get charged on the interest.
And, given that you are _being_ charged interest then there is no interest free period in which you can pay and so you are being charged interest on the interest until your payment reaches the credit card company.

Brydav

I expect it depends on the dates when interest is added, Soapy. It'll be there in the T&C somewhere - they always find a way to screw a few more pennies out of you, lol.

Congratulations on (almost!) clearing the balance anyway! :T

danothy

If you assume your repayment is made against the balance, and if you don't pay off the full amount then you're effectively taking a slice/chunk off the bottom and they're put the interest on the top, so next month the remaining balance and the applied interest accrue interest - still compound interest if you think of it that way, it's just the size of the chunk off the bottom will be bigger than what they layer on the top.

Eco_Miser

Interest is calculated on the daily balance, which periodically increases when interest is charged, and decreases when repayments are made. This does not fit the classic compound interest formula anyway. Under normal circumstances the repayments exceed the interest, so there is no compounding, and no interest on interest. However you could warn that if repayments are missed, in addition to any other penalties, interest is charged on interest.

Brydav

I think I'm in agreement with Martin on this one. "Paying interest on the interest" is still a valid description of compound interest.

Once the interest has been added, it becomes part of the overall debt. The new regulation ensures that repayments are at least 'a sum equal to' the cost of the interest, but the distinction becomes irrelevant. If half was used to clear the loan and half for the interest the net result would still be the same. Unless the original loan was at a promotional rate but the interest is not - in that case, it would obviously be better to clear the interest first.


This reminds me of adverts for products that say you pay "no VAT". You can't avoid paying VAT - that would be illegal - what the seller is doing is discounting the price by an amount 'equal to' the VAT. The net result for the customer is the same, but it makes the poster more eye-catching.

Million_Percent

Agree with Brydav and Martin. The concept of compound interest still applies. The fact that the minimum monthly repayment dictates that you pay off at least the interest accrued in that month means that under normal circumstances you won't be paying 'interest on the interest'. However, as soon as you miss a payment or incur a fee etc then you will pay additional interest on the interest.

I think it is important to remind people that the interest is added to the overall debt. I wouldn't want anyone to think that the interest added is somehow in a different pot that doesn't itself accrue interest. So my wording would be "If your monthly repayment is less than the interest charged then you pay interest on the interest".

cse

It is as it has always been - you pay interest on the average daily balance. In the simplest circumstance, between your statement date (when the interest is added) and the payment due date (when the interest is paid off), the interest is part of that average daily balance, therefore you are being charged interest on it

Also, it's important to note that paying the minimum payment does not guarantee that your interest will be paid off. Say you have a mixture of purchase and cash balance:

£1000 cash principle balance @ 27.9%
£25 cash interest @ 27.9%
£1000 purchase principal balance @ 17.9%
£15 purchase interest @ 17.9%

Your min payment will be interest + 1% of balance = £60. That £60 will pay off highest rate debt first, which is the £25 of cash interest and £35 of the cash principal

2sides2everystory

MSE's Dan and Alana haven't been "got at" whilst they've been mixing it with the enemy out their Martin, have they ?

Quibbling over a years old phrase like 'interest on interest' sounds exactly the kind of thing bank lobbyists would introduce knowing that most of their customers are stll not financially educated enough to know that the same old danger of compound interest lurks behind every credit card just the same as it has always done ...


I'm a little worried at the hint of this kind of MSE mellowing tbh :eek:

The phrase I think would be most useful to bring back is "Consumer Revenge" - I liked that a lot :money:

Percy1983

If you look at you balance at the end of the year it would be less if you wasn't charged interest, you balance is higher because you have been charged interest and you are paying interest on said balance.