Credit card interest calculation

moneymattl

Hi all,

I have a small bit of confusion regarding credit card interest. I usually pay off my card in full but was surprised at the interest calculation this month.

In May my credit card balance was £2,245.18 due 22nd June. I knew I couldn’t pay it all off so paid off £1000 on 11 June expecting to pay interest on the remaining £1,145.18.

Come 26th June my total balance was £2,249.96 and was charged £69.77 (which was calculated on the balance of £2,249.96). 

Is this correct? With the same logic, if I paid off £2,245.17 taking my balance to 1pence and then racked up to £2,249.96, I would charged the same amount of £69.77? I fail to see the logic of this.

Here’s what it says on my statement:

We use your payments to clear any overdue amounts before we apply them to your latest minimum payment. We will reduce the amount you owe in the following order:

· any overdue amounts from previous statements; then

· the remaining balance on your statement; then

· any recent transactions not yet shown on your statement.

We use your payments to pay off balances charged at the highest interest rate first and so on down to balances with the lowest interest rates.

If there is more than one type of balance at the same interest rate, they are paid off in the following order: cash transactions, purchases, balance transfers and money transfers, and then default charges (plus any interest or charges incurred as a result of those balances). For each type of balance, your payments will pay off the oldest balance (and related fees, charges or payment protection insurance) first.

DullGreyGuy

Interest is calculated daily based on your balance each day and so you'd be paying interest on the full balance to start with and then when your 11 June payment cleared the remaining interest would be on the reduced balance. 

CliveOfIndia

moneymattl said:

Come 26th June my total balance was £2,249.96 and was charged £69.77 (which was calculated on the balance of £2,249.96). 

Is this correct? With the same logic, if I paid off £2,245.17 taking my balance to 1pence and then racked up to £2,249.96, I would charged the same amount of £69.77? I fail to see the logic of this.

This is correct, and is how all credit cards work - though it does catch a lot of people out.  Each transaction starts accumulating interest on a daily basis, and the total interest is added to the balance.  But if you pay in full, then the interest for that month is waived.  Pay anything less than the full amount, then all the interest is applied.

To illustrate in simple figures, say your billing cycle runs from the 1st to the 30th of the month.  You spend £1000 on the 1st June (and spend nothing else that month).  Each day, interest is added to that £1000.  If you pay off the £1000 on your payment due date (let's say 20th July), then the accumulated interest is waived.  But if you pay £999 on 20th July, then all the accrued interest on the full £1000 becomes payable.  The remaining £1 on your balance will then accrue interest on a daily basis and will be added to the next statement.  This is also why you get "trailing interest" for the month following the one where you didn't pay in full.

It's a little trickier to work out in practice, as interest is calculated on a daily basis (though I'm sure it wouldn't be too difficult to knock up a quick spreadsheet!).  So, using the same billing cycle:

£100 spent on 1st June will accumulate 30 days of interest.

Then you spend £500 on 10th June, that will accumulate 20 days of interest.

The you spend £271 on 29th June, that will accumulate 1 day's worth of interest.

I've kind of "rounded up" dates here and ignored 30/31 day months etc for simplicity, but hopefully it will help to illustrate how it works.

cymruchris

Yes it's correct. As you say if you'd left a balance of £0.01p - you'd have paid interest on the £2,249.96. That's how credit cards work - clear in FULL and the interest is waived - leave any balance (no matter how small), and interest is charged on the FULL statement amount.

moneymattl

Thank you for the very clear answers! Lesson learnt the hard way

cymruchris

moneymattl said:

Thank you for the very clear answers! Lesson learnt the hard way

You'll know for next time!!!

Brie

Don't forget that now that you haven't cleared the entire balance any purchases are likely to accrue interest from day 1 as well. 

paul_c123

If you phone up, plead ignorance and are really charming/lovely on the phone, they can waive the interest. I've seen it done many times.