Cash Withdrawal Interest

Lil306

I have a query with a credit card supplier. I'm a bit confused.

Basically I withdrew some money, and the advance fee + cash interest was added onto the account before my statement date

Paid the full amount via direct debit, then 6 days later I was charged "interest". I queried this and they said it was due to T&C. Which I'm guessing is due to interest on top of interest for remaining balance

I don't agree with it, but again. I left it to run and pay the full amount via DD (£2.31) on my next statement date

I've now just checked my account again and the current balance is £0.05 because of "Interest". I've paid the full balance twice now

This doesn't even seem remotely right to me, as you're always going to be in arrears with the balance from the way they charge it


Is this right. I can understand it from interest, but they're charging interest after my statement is due. So I pay the full amount and then they ask for me to pay more again

[Deleted User]

It's correct. It was trailing interest, accrued between your statement date and when you paid off the balance.

Now you've cleared the second statement in full, they will waive any further interest.

Always pay off as soon as possible to reduce interest.

Lil306

Deleted_User wrote: »

It's correct. It was trailing interest, accrued between your statement date and when you paid off the balance.

Now you've cleared the second statement in full, they will waive any further interest.

Always pay off as soon as possible to reduce interest.

Thanks.

I read somewhere that you need to pay off two statements in full before it's considered cleared. So when I saw the account balance as £0.05 it raised questions with me.

As long as it's paid off, I'm happy with this

chattychappy

Cash interest is charged daily from when the withdrawal takes place.

The problem with DD is that there is a long delay (typically 2 to 4 weeks) from when a statement is generated to when payment is taken. This is great whilst you are getting purchases interest free (the "up to 56 days" thing), but works against you if you are either paying daily cash interest (or purchase interest because you're not paying in full).

Once you are accumulating interest this way, it is better to pay as much as you can as soon as you can to reduce interest. But bear in mind that in most cases, the DD will be taken anyway and this could leave you short.

Lil306

chattychappy wrote: »

Cash interest is charged daily from when the withdrawal takes place.

The problem with DD is that there is a long delay (typically 2 to 4 weeks) from when a statement is generated to when payment is taken. This is great whilst you are getting purchases interest free (the "up to 56 days" thing), but works against you if you are either paying daily cash interest (or purchase interest because you're not paying in full).

Once you are accumulating interest this way, it is better to pay as much as you can as soon as you can to reduce interest. But bear in mind that in most cases, the DD will be taken anyway and this could leave you short.

Thanks

I'll keep an eye on it, my payment was made in full both months so I won't be happy if they deduct money for a 3rd month when the 2nd month should have cleared any outstanding amount

Terry_Towelling

Lil306 wrote: »

Thanks

I'll keep an eye on it, my payment was made in full both months so I won't be happy if they deduct money for a 3rd month when the 2nd month should have cleared any outstanding amount

Doing a few backwards calculations based on £2.31 and £0.05 it looks like your interest rate will be somewhere between 25% and 30% APR for cash. As pointed out, leaving it until the direct debit is taken means interest will accrue for a longer period.

My thinking is that interest on cash never stops being charged until the amount withdrawn - and any interest associated with it - comes to less than £0.01. On your next statement interest would come to about 8/100s of a penny (based on settling at the direct debit date) and so nothing will be charged.

My thinking may be wrong (highly likely) but I checked a couple of sets of T&Cs (briefly) and couldn't really find anything that fully explained the point at which compounding interest on cash would stop.

Lil306

Terry_Towelling wrote: »

Doing a few backwards calculations based on £2.31 and £0.05 it looks like your interest rate will be somewhere between 25% and 30% APR for cash. As pointed out, leaving it until the direct debit is taken means interest will accrue for a longer period.

My thinking is that interest on cash never stops being charged until the amount withdrawn - and any interest associated with it - comes to less than £0.01. On your next statement interest would come to about 8/100s of a penny (based on settling at the direct debit date) and so nothing will be charged.

My thinking may be wrong (highly likely) but I checked a couple of sets of T&Cs (briefly) and couldn't really find anything that fully explained the point at which compounding interest on cash would stop.

So it would be smarter to pay off the full amount now rather than when the direct debit is due?

Terry_Towelling

Lil306 wrote: »

So it would be smarter to pay off the full amount now rather than when the direct debit is due?

When the amount on which the interest is being based is so small, it shouldn't be an issue.

Paying asap after a cash transaction appears on a statement is usually best, but the ins and outs of paying for a cash transaction before it appears on a statement are not always straightforward.

I'll try to give an example of how it can get messy. You get a statement for £2000 (all purchases) and before the direct debit pays it off you withdraw £515 in cash (incl. a £15 fee). You pay off the £515 cash transaction the day after you make it and before it appears on a statement. Sadly, your payment will be set against the £2000 on your last statement, not against the unstatemented cash.

This means the cash transaction (and fee) will continue to rack up interest until the direct debit is taken. At this point, another problem emerges. Does your issuer always collect the full amount of your previous statement (i.e. £2000) or do they just collect the unpaid portion which is now only £1485 after your £515 was applied against it?

If they collect the whole £2000, your next statement will only show the interest on the cash transaction (assuming no other transactions have been made) and that interest will compound until you pay it. So the sooner you pay it the better and the lower the chance/amount of any further interest the following month.

However, if your issuer only collects the £1485 left unpaid from your statement, your next statement will show the cash amount, plus fee, plus interest so far as still outstanding - and so it goes on.

And finally, if you have nothing on your card and no statement balance to pay and make a cash withdrawal, you would be best advised to try and pay it off asap - even before a statement showing it.

I said it wasn't straightforward but it is always best not to take cash out on a credit card - unless there is no fee and no interest.

Lil306

Terry_Towelling wrote: »

When the amount on which the interest is being based is so small, it shouldn't be an issue.

Paying asap after a cash transaction appears on a statement is usually best, but the ins and outs of paying for a cash transaction before it appears on a statement are not always straightforward.

I'll try to give an example of how it can get messy. You get a statement for £2000 (all purchases) and before the direct debit pays it off you withdraw £515 in cash (incl. a £15 fee). You pay off the £515 cash transaction the day after you make it and before it appears on a statement. Sadly, your payment will be set against the £2000 on your last statement, not against the unstatemented cash.

This means the cash transaction (and fee) will continue to rack up interest until the direct debit is taken. At this point, another problem emerges. Does your issuer always collect the full amount of your previous statement (i.e. £2000) or do they just collect the unpaid portion which is now only £1485 after your £515 was applied against it?

If they collect the whole £2000, your next statement will only show the interest on the cash transaction (assuming no other transactions have been made) and that interest will compound until you pay it. So the sooner you pay it the better and the lower the chance/amount of any further interest the following month.

However, if your issuer only collects the £1485 left unpaid from your statement, your next statement will show the cash amount, plus fee, plus interest so far as still outstanding - and so it goes on.

And finally, if you have nothing on your card and no statement balance to pay and make a cash withdrawal, you would be best advised to try and pay it off asap - even before a statement showing it.

I said it wasn't straightforward but it is always best not to take cash out on a credit card - unless there is no fee and no interest.

Thanks, I'm aware not to withdraw cash, however it was an emergency situation at the time in which I needed it. I was prepared to pay back the interest, just wasn't sure why I kept paying it after the second one but I understand it.

I'll just make sure I clear the balance before the next statement to make sure there's nothing left to pay so interest doesn't keep getting added to the account regardless of how much is left.

chattychappy

Terry_Towelling wrote: »

My thinking is that interest on cash never stops being charged until the amount withdrawn - and any interest associated with it - comes to less than £0.01. On your next statement interest would come to about 8/100s of a penny (based on settling at the direct debit date) and so nothing will be charged.

My thinking may be wrong (highly likely) but I checked a couple of sets of T&Cs (briefly) and couldn't really find anything that fully explained the point at which compounding interest on cash would stop.

Agreed. I went through this loop a couple of years back with some T+Cs. It seemed that only the effect of interest on interest becoming vanishing small and "rounding" is enough to stop interest for sure. For a while MBNA would round up interest to £1, so in theory you'd be stuck forever. Overpaying (against the T+Cs), of course would also stop this.

But certainly there have been occasions when I expected "trailing interest" when nothing was charged. Regardless of T+Cs, I suppose some cards just write off small amounts of trailing interest. (Cheaper than having a battle on a telephone.) I also saw some T+Cs where the rule "pay off the balance in full to avoid interest" was drafted so as to apply to all interest, even cash interest. So after paying your outstanding cash transaction (and interest), you'd still get some interest on the next statement, but pay that off in full and there's nothing more. In practice that seems to be what many cards do.

People often quote the "you must pay your statement in full for at least two months to stop interest" as if it's a rule. I have never seen that in T+Cs. But it's not a bad guideline.