Can someone help me understand CC interest?

easyasonetwothree

Hi everyone,
I'm relatively new to credit cards and I'd like some help understanding how the interest payment works. Here's my numbers:
August statement £0
September statement £171 due 16/10

I set up a DD to pay £5, so I manually paid £166 on 16/10. However I set up the DD too late so it didn't go out. 

Since my September statement I spent another £79, so a total of £84 was on the card.

On 20/10 I was charged £3.56 interest.

Is that interest charged on the £5?! I didn't think I would be charged on the £79 since that wasn't on the September statement. Or am I getting charged for the whole £171 despite paying the vast majority off?

In case it's relevant, it's a NatWest credit card on 21.9%.

Thanks in advance for any insight!

MorningcoffeeIV

You're charged interest on the daily balance. Interest is only waived if you clear in full each month.

From what you've said, your daily balance was £171 for a lot of the period.

Reddleman79

You ought to have set up the DD To pay off the whole balance, then interest would never be charged. Credit cards are an expensive way to borrow money. I just look upon them as a convenience and a way to defer payment, while I earn interest on the money before it pays off the balance at the end of the month. If you're wanting to spend money you don't have, you can get a loan cheaper than using a credit card.

daveyjp

As soon as you spend you have borrowed money and interest starts accruing at the daily rate.

Spend £100 on day one with a daily rate of 0.1% and on day two you owe £100.10, by the end of the month if you spend nothing more the spend plus interest is about £103.

Pay £100 off in full by the payment date and the interest is waived, pay off part, say £50, you then have a carry forward of £53 which then incurs daily interest.

CliveOfIndia

easyasonetwothree said:

Is that interest charged on the £5?! I didn't think I would be charged on the £79 since that wasn't on the September statement. Or am I getting charged for the whole £171 despite paying the vast majority off?

This is a common misunderstanding.  Yes, you'll be charged interest on the full £171, not just the £5 that's remaining.  If you pay the full balance then all the accrued interest for that month is waived - kind of a "Brucie Bonus", if you will.  But pay anything less than the full balance, and all the accrued interest becomes payable.

It's worth noting that interest is accrued daily.  So if you buy something on "Day 1" of your accounting cycle then you'll accrue more interest on that transaction than you would if you buy it on "Day 30" (or whatever) of your accounting cycle.

easyasonetwothree

Reddleman79 said:

You ought to have set up the DD To pay off the whole balance, then interest would never be charged. Credit cards are an expensive way to borrow money. I just look upon them as a convenience and a way to defer payment, while I earn interest on the money before it pays off the balance at the end of the month. If you're wanting to spend money you don't have, you can get a loan cheaper than using a credit card.

I think you can see by the amount I spent on the card I really don't need to get a loan. 

easyasonetwothree

CliveOfIndia said:

easyasonetwothree said:

Is that interest charged on the £5?! I didn't think I would be charged on the £79 since that wasn't on the September statement. Or am I getting charged for the whole £171 despite paying the vast majority off?

This is a common misunderstanding.  Yes, you'll be charged interest on the full £171, not just the £5 that's remaining.  If you pay the full balance then all the accrued interest for that month is waived - kind of a "Brucie Bonus", if you will.  But pay anything less than the full balance, and all the accrued interest becomes payable.

It's worth noting that interest is accrued daily.  So if you buy something on "Day 1" of your accounting cycle then you'll accrue more interest on that transaction than you would if you buy it on "Day 30" (or whatever) of your accounting cycle.

This makes sense, thank you for explaining!

NorwichMan

Maybe also worth noting, if the £5 direct debit was set up as a direct debit for the "minimum payment" then (at least with my cards) if I make a manual payment then the direct debit is reduced accordingly. So, if my minimum payment was £5 and I made a manual payment of £3, they would collect £2 in the direct debit. If I made a manual payment of £5 or more then they will not take the direct debit. So, if I want to clear the whole statement balance by manual payment (and have a DD set up for the minimum payment) I have to make a payment for the full amount, not the full amount minus the minimum, if that makes sense.

If the £5 DD was not for the minimum payment but for a fixed amount, then they will still take it irrespective of any manual payments.

This is how it works for the cards I have.

CliveOfIndia

DDs in conjunction with manual payments can be a bit tricky, and it depends on the card.  Usually, if you make a manual payment then it will reduce the DD, but that's not always the case - some cards work differently and will still take the full DD payment.  Interestingly, on one of my cards it says that making a manual payment won't reduce the DD, but it does actually reduce it.  Go figure.

Added to which, timing can be an issue.  A lot of banks will generate the DDs in advance.  For instance, they'll have a batch run on a Monday evening that "sets up" the DDs due for that week.  If you have a DD for the full balance, and your payment date is the Friday, your DD for the full balance as of Monday night will be set up, then collected on the Friday.  If you make a manual payment on Wednesday, that won't affect the DD amount, it'll still take the balance as of Monday.

All banks work differently, and I'd hazard a guess that this "weekly" cycle is now becoming less commonplace - some will do it daily, some will do it every other day, whatever.  But there are plenty of stories on this forum where people have made a last-minute manual payment only to find an "unexpected" DD has also been taken a day or two later.  Just something to bear in mind.

Angelica123

I was wondering why set up DD for £5 rather for full statement?