Interest Calculation Query

Fingerbobs

Something I've been wondering about interest payments on savings accounts, I wonder if anyone can advise?

In most cases, interest is calculated daily, but paid either monthly or annually.

Is the daily interest calculated according to the account balance at a specific time on that day, or an average of the account balance over the preceding 24 hours, or something cleverer?

Doesn't really matter to me, but I'd just be interested to know how this works.

Thanks!

Lansdowne

As far as I know there's no such thing as parts of a day. The terms and conditions usually contain phrases such as "cash paid in at branch will be credited to your account the same day/ the next working day/ etc" or "cheques paid in are treated as cleared funds after Y days but begin to earn interest after X days".

There is never a time of day associated with a deposit or withdrawal.

Gromitt

The daily interest is probably calculated at the same time as the usual transaction run is done, which is different depending on the bank.

Pure guess, but it would be logical. At least in my eyes. Some banks don't care about your balance during the day, you can even go overdrawn as long as the balance is in credit by the end of the day/closing time/transaction run time (whichever the bank uses, for some banks they use midnight, others 6:30pm, etc)

SnowMan

Can't say for sure but I think the interest is usually calculated based on the balance at 'close of business'. There is a bit of guesswork in working out how any bank does it.

As mentioned 'close of business' will be a set time in the day depending on the bank. For example for Nat West it is 6:30pm on each working day. For HSBC or Tesco for example it is around midnight (or in the 15 minutes before).

What that means is if you have a Nat West account and you are transferring money out through faster payments it is best to do it just after 6:30pm especially on a Friday (say 7pm) because you will then get interest from Nat West for the Friday, Saturday and Sunday, even though the money is elsewhere.

Now if the 7pm Friday transfer is to an account such as Tesco with a midnight cut-off...........

Fingerbobs

Thanks all!

So in theory, you could do Snowman's devious trick every day - transfer to Tesco at 7pm, then back to NatWest the following day before 6:30pm - and effectively earn interest twice on the same money.

I'm guessing, in practice however, it would only yield peanuts due to the limits on Faster Payment amounts and its a lot of faff for little return.

SnowMan

Fingerbobs wrote: »

I'm guessing, in practice however, it would only yield peanuts due to the limits on Faster Payment amounts and its a lot of faff for little return.

Yes. But it's very satisfying all the same. I get withdrawal symptoms if I don't make these transfers on a regular basis

With the possibility of a lot of banks introducing faster payments for larger amounts by 1st January 2012 to meet the terms of the Payment Services Directive it will be interesting to see what 'opportunities' come up in the next few months.

SnowMan

Gromitt wrote: »

The daily interest is probably calculated at the same time as the usual transaction run is done, which is different depending on the bank.

Pure guess, but it would be logical. At least in my eyes. Some banks don't care about your balance during the day, you can even go overdrawn as long as the balance is in credit by the end of the day/closing time/transaction run time (whichever the bank uses, for some banks they use midnight, others 6:30pm, etc)

Cracking post Gromitt