I'm trying to understand how interest is charged after getting a higher interest charge than expecte 8 December 2022 at 2:16PM in Credit cards 8 replies 187 views

WitchDrAsh2

So I'm trying to reconcile my expectations with what I've just encountered and I'm trying to work out whether it's normal.

I have an under-used First Direct Credit Card, we bought some stuff for the house and put £4000 on to it, we got the statement, now I didn't have £4000 but I had £3100 so that's what I paid, leaving the balance at £900, my expectation was that I would then be charged interest on the remaining £900 balance, what actually showed up was an interest charge on the entire £4000 balance, despite my £3100 payment, on questioning this I was told had I paid it off in full I would incur no interest, but regardless of how much I had paid off (I could leave £0.01 balance) I would be charged interest on the statement amount of £4000.

So I guess my question is, is this normal? This is not what I was expecting, and I'm fairly sure I've not seen this happen on my Barclaycard, which is our general go to credit card, although this normally gets paid off in full each month, so I can't easily go and look for comparable situations.

Thanks in advance

Owen

born_again

Yes.
Standard practise.

WitchDrAsh2

wow horrible, ok I'll have to make sure I get a payment in before the statement date if I know I'll carry a balance, thanks

grumbler

WitchDrAsh2 said:

 my expectation was that I would then be charged interest on the remaining £900 balance, what actually showed up was an interest charge on the entire £4000 balance, despite my £3100 payment, on questioning this I was told had I paid it off in full I would incur no interest, but regardless of how much I had paid off (I could leave £0.01 balance) I would be charged interest on the statement amount of £4000.

To be precise, it's not interest on the statement balance. It's interest on all purchases from the day of each transaction until the statement date. Earlier purchases attract more interest, for a purchase made one day before the statement date it's just 1-day interest.

In other words, it's interest calculated daily on the running balance.

WitchDrAsh2

grumbler said:

WitchDrAsh2 said:

 my expectation was that I would then be charged interest on the remaining £900 balance, what actually showed up was an interest charge on the entire £4000 balance, despite my £3100 payment, on questioning this I was told had I paid it off in full I would incur no interest, but regardless of how much I had paid off (I could leave £0.01 balance) I would be charged interest on the statement amount of £4000.

To be precise, it's not interest on the balance. It's interest on all purchases from the day of each transaction until the statement date. Earlier purchases attract more interest, for a purchase made one day before the statement date it's just 1-day interest.

In other words, it's interest calculated daily on the running balance.

I see that makes sense too as the £4000 payment happened to basically fall on day 1 of my billing cycle by the looks of it so had accrued maximum interest. Whereas normally there would be lots of small purchases so a start of month balance would be low

Ebe_Scrooge

Yes, this is how all credit cards work, even your BarclayCard.  Interest starts to accrue from the moment a transaction hits your account, and is calculated on a daily basis until such time as it's repaid.  But if you repay the full statement balance, then the accrued interest is waived - kind of a Brucey Bonus

But as you've discovered, pay anything less than the full balance and the accrued interest becomes payable.  So in your example, you will have been charged interest of approximately 30 days on the £4000 (depending on the precise dates of your billing cycle, the purchase and the payment).  Had you spent the £4000 on the day before the statement was produced, you'd only have had one or 2 day's interest accrued.

WitchDrAsh2

Ebe_Scrooge said:

Yes, this is how all credit cards work, even your BarclayCard.  Interest starts to accrue from the moment a transaction hits your account, and is calculated on a daily basis until such time as it's repaid.  But if you repay the full statement balance, then the accrued interest is waived - kind of a Brucey Bonus

But as you've discovered, pay anything less than the full balance and the accrued interest becomes payable.  So in your example, you will have been charged interest of approximately 30 days on the £4000 (depending on the precise dates of your billing cycle, the purchase and the payment).  Had you spent the £4000 on the day before the statement was produced, you'd only have had one or 2 day's interest accrued.

I suspect I'm probably inside my payment schedules for the Barclaycard that combined with that being made up of a lot of small transactions rather than one large one means that my statement balances are normally low, because I actually pay off the balance about 2 days before my statement is created which leaves very little for Barclays to charge interest on each month so it's probably just been buried under much larger transactions and may only be a few pence as a result of the low statements

WitchDrAsh2

Thanks for helping me understand this better, I guess what happens is interest builds up over the month, but if you pay it off they waive the interest, if you don't pay it off completely then the interest is added to your account, rather than my initial assumption which was that you picked up interest on your balance each month, which is more straightforward to jump to but makes a lot less sense when you consider that a purchase at the start of the month should attract more interest that an equivalent one at the end

Ebe_Scrooge

WitchDrAsh2 said:

Thanks for helping me understand this better, I guess what happens is interest builds up over the month, but if you pay it off they waive the interest, if you don't pay it off completely then the interest is added to your account, rather than my initial assumption which was that you picked up interest on your balance each month, which is more straightforward to jump to but makes a lot less sense when you consider that a purchase at the start of the month should attract more interest that an equivalent one at the end

Yep, that's about the size of it.  To summarise, every transaction accrues interest from the transaction date until it's paid off, but if you pay the statement balance in full, then all interest is waived.

It can be a little confusing to get your head around, and catches a lot of people out!

The "correct" way to use a credit card is to wait for the statement to arrive, then pay the full statement balance before the "payment due" date (typically around 3 weeks from when the statement arrives, though it can vary between lenders).  Apart from costing you zero interest, doing this also put lots of nice green ticks on your credit record (if you're at all bothered by this!)