Do we need to change the way credit cards can charge interest?

Synthespian

Like many people I pay off the full balance of my card every month, the interest rates are so high (wish we could change that from the profiteering) I don't want to be charged interest.
For my own personal reason, I do this payment manually rather than using the bank's automated system.

Interestingly this last month, I made a mistake and was £8 short.  I normally overpay, so was aiming to be £32 over.

Here's what I discovered.

Pre-amble - if I have a loan, it is charged interest daily, on the balance of my loan.  As soon as I pay off some of the loan, the balance reduces and the amount of interest charged reduces from that day onwards.

BUT ... Credit Card ... I had a balance of £364 at the end of my month.  I paid £350 (by mistake) and then the automated system took a further £8.

So, technically, I had a balance of £8 leftover.
The credit card company charged me interest on the full £364, as the balance wasn't cleared in full.

I got charged £11 interest for effectively an £8 overdraft.

Despite having a (badly worded) up to 56 days interest free on purchases of which 4 of them were technically outside that range with a value of £60, they still charged interest on the entire balance because it wasn't fully paid off.

In the T&Cs and "allocation of payments" after this point, they would then attribute payments to the items charging the most interest first.

Surely, surely, the fair process would be for:
* the earliest transactions in the month, that would have otherwise charged / be outside the interest free period be paid off first with any payment
* only charge interest then on the later outstanding transactions of the remaining balance.

At the point of my statement, I owed £8 to the bank, so to allow them to charge interest on things I had technically paid off seems a fraudulent / massively in the banks' favour process, and a change to the system to make it fairer for all would be useful in today's cost-of-living / inflation hit process.
Otherwise it's just another thing where the banks can make money over people.

---
P.S. Yes, I could use the automated system. I don't. I have my reasons. I've not made a mistake in years up to this point. (many personal reasons why it happened now)
Yes, it's the way it is, but this is about challenging things for change.

eskbanker

Interest is charged based on the daily balance, but I think you're forgetting that it'll be charged from transaction date to payment date, if you fail to pay the balance in full by the statement due date.

If you plug all of the daily figures into a spreadsheet, you should be able to reconcile it, but effectively you'd be paying daily interest on a balance building up to £364 between the transaction dates and the statement date, then the full £364 for each day between then and paying the £356, then on £8 each day until finally fully paid off (which will result in trailing interest on the next statement).

When paying off in full, the card companies waive the interest both between transactions and statement, and also between statement and payment (by due date), but if you fail to pay in full, they no longer make those concessions.

MorningcoffeeIV

Synthespian said:

Surely, surely, the fair process would be for:
* the earliest transactions in the month, that would have otherwise charged / be outside the interest free period be paid off first with any payment
* only charge interest then on the later outstanding transactions of the remaining balance.

Surely surely not.

If you stop interest being charged on any amount repaid by the statement then the interest rates will need to increase.  So now  you're loading more of the interest burden on those with revolving balances, 

It currently works exactly as your loan example - once you repay any amount, the interest stops on that amount. But with the added benefit of if you clear you full, all interest is waived.

born_again

You could just call them say you made a honest mistake & as you have never done it before will they ( please) waive the interest.

grumbler

Synthespian said:

So, technically, I had a balance of £8 leftover.

No, you were charged interest on all your purchases from the day you made them. You were given an opportunity to have this interest waived (a bonus for paying the balance in full and on time), but 'for personal reasons' you missed it.

Do we need to change the way credit cards can charge interest?

What you want is in fact even better bonus/advantage. compared to what you currently have.

retiredbanker1

In my opinion nothing needs to change. The OP made a mistake not the credit card company.
The interest charge would not have happened with a direct debit set up to pay the full amount.

Dandytf

retiredbanker1 said:

In my opinion nothing needs to change. The OP made a mistake not the credit card company.
The interest charge would not have happened with a direct debit set up to pay the full amount.

Only 'Change' is move away from Credit Cards towards Digi Apps, such as PayPal etc...
I hope to be Card Free once I achieve Clear+Close status. 

tempus_fugit

Dandytf said:

retiredbanker1 said:

In my opinion nothing needs to change. The OP made a mistake not the credit card company.
The interest charge would not have happened with a direct debit set up to pay the full amount.

Only 'Change' is move away from Credit Cards towards Digi Apps, such as PayPal etc...
I hope to be Card Free once I achieve Clear+Close status. 

Credit cards give you, as has been related above, up to 56 days of free credit. Paypal won't give you that unless you use their credit scheme, which is the same difference really. Either way, you have to know what you are signing up for and how to use it effectively. I'm happy with my credit cards as I know how to use them to my advantage.

retiredbanker1

tempus_fugit said:

Dandytf said:

retiredbanker1 said:

In my opinion nothing needs to change. The OP made a mistake not the credit card company.
The interest charge would not have happened with a direct debit set up to pay the full amount.

Only 'Change' is move away from Credit Cards towards Digi Apps, such as PayPal etc...
I hope to be Card Free once I achieve Clear+Close status. 

Credit cards give you, as has been related above, up to 56 days of free credit. Paypal won't give you that unless you use their credit scheme, which is the same difference really. Either way, you have to know what you are signing up for and how to use it effectively. I'm happy with my credit cards as I know how to use them to my advantage.

Somebody obviously has it in for credit cards - go ahead and use PaypaL, l good luck if you need to make a claim which with a credit card S75 applies for purchases between £100 and £30k.

MrFrugalFever

I think sometimes people forget that credit card companies are lending THEIR money to the consumer and as such can pretty much determine their own terms and conditions (within FCA regulations) as to how they charge for such privilege. Ultimately, if people don't like the way their CC provider works they can either change to a different one or not have one at all.

LunaLater

I can’t see any reason for needing a change. If you’ve some bizarre aversion to paying by direct debit then it’s not hard to read your bill and pay the correct amount.