Questions from credit card newbie

miser54

Apologies in advance for what may be a stupid question, and the long thread for what is essentially one pound of interest, I am just trying to understand how things work

I’m a bit embarrassed asking this as finance is actually my area, but consumer credit is not something I’ve ever touched either professionally or personally

In the summer, I took out a credit card to put all my spending through in order to build up credit history. I’ve been fortunate/savvy (delete as necessary) enough to have no credit or mortgage history but I recently encountered a situation where this lack of borrowing was to my detriment

I’ve been using the card for all purchases and paying the balance off as soon as it finishes pending. It usually pends for 2 working days and takes 2 working days to pay off, so say a maximum of one week between any purchase and paying it off.

Last month, due (I believe) to these delays, £35.70 was carried over. As I anticipated, I was fairly informed I’d pay interest if it carried over again, so I paid it off as soon as I was allowed to. No interest was charged.

The same happened this month, for £59. I thought nothing of it again, however my statement now says I am due to be charged around a pound of interest

My questions:

- From my calculations, it seems as though I’ve been considered as if I’d carried the £35.70 over again into this month, thereby incurring interest. The payments I’d made have instead been used to pay off more recent, interest-free, purchases. I thought that the most expensive interest-bearing debt is paid off first, so it should have paid off the £35.70 and then I’d be given 2 months to carry over the £59, and so on

- If this is not the case, is the only option to use the card every other month, so use it one month, then make sure to have a zero balance next month?

I apologise for any silly questions, and I’m hoping someone can educate me

Thanks

eskbanker

Not sure I'm fully understanding what's happened, but it sounds like it may be a trailing interest issue, in that if you incur interest one month, then the following month there'll be a small amount of additional interest charged to reflect the period from statement date to when you made the repayment.

Best practice is to wait for your statement to be generated and then repay in full by the due date, rather than trying to repay each transaction individually as you go, as that doesn't really contribute as much to your credit history.

lr1277

Let's say your statement date is the 1st of the month. So all the spending you did in September would be reflected in the statement produced on 1st October. On the statement, there will be a pay by date (not sure of the exact phrasing). As long as you pay the amount owed that is shown on the statement by that date, they you are fine. Most people set up a direct debit to pay the balance if full. The credit card company normally takes the money from your current account on the pay by date shown on your statement. A few credit card companies take the money earlier.

Some statements have an interest payable figure shown. This would be the amount of interest you WOULD pay if you didn't pay the current bill by the due date.

Interest showing on the statement is tricky. Some card companies show the interest payable as a transaction line on the statement. However when I had cashflow problems and was only making minimum payments, the total owed figure was always greater than the sum of the transactions on the statement. So my card compay were adding to the owed balance but not showing the interest added on its own transaction line.

Does that help?

lr1277

Other points to remember.

Know your current balance, even approximately. Don't let it be more than your credit limit. Further to my point about statement dates. Let's say your credit limit is £5k. You shouldn't spend more than £2.5k in a given month because you might want to keep spending after the statement has been produced but before you pay back the amount on your most recent statement. Unless you pay back the amound owed very soon after the statement is produced.

You can spend right upto your limit in one month and then make a payment so your balance is nowhere near the credit limit, but should you have a direct debit set up, that might mess things up, depending on the card company concerned.

Kim_13

The statement has to warn the customer of what that month’s estimated interest will be - but it is not charged if you clear the balance in full by the due date shown on the statement. If you’ve been paying once the transactions stop pending, there is no way that you can be charged interest - in fact you are paying too early if you regularly get statements with zero on as the statement figure is what is reported to the CRAs, so it will look like a card used irregularly at best.

My statements are produced on the 22nd and are due to be paid in the middle of the following month. I have a Direct Debit set up but tend to clear in full by debit card at the start of the month and have never been charged any interest. If you have a DD set up to clear in full it is designed so that you are never charged any interest. The only time I’ve ever paid before the transaction hit the statement was when I had a lower limit and needed to free some up in order make another purchase.

dresdendave

You are over complicating things.

 Set up a pay in full Direct Debit for your credit card. Use your card to purchase items, making sure you keep safely below your CC limit.

You will receive a statement monthly showing your total spend, this will then need to be paid by a certain date, usually about 20-25 days after the statement date. The DD will pay it.

Only thing you need to do is make sure you have sufficient funds in your current account to cover the DD.

Keep doing this and you will never pay a penny in interest.

Nasqueron

If I am reading your post right, you are spending on the card then paying it off as soon as the payment clears? This is completely the wrong way to use a card to create credit history as it largely appears to be unused (credit agencies only see what is reported on the statement every month). 

A credit card is incredibly simple to use to build a credit history:

1) spend on card normally
2) on a fixed date you get a statement with a due date
3) on the due date, you have a direct debit setup to pay the card in full from your bank

That's it

You can of course pay the bill manually at any point after the statement is made before the due date but that just means the card issuer has your money sooner than you need. A manual payment also runs the risk of missed or late payments - say with weekends or bank holidays, while a DD is taken every month on, or the first working day after, the due date.

By doing what you are doing you are indicating the card is hardly used and also managed to incur interest by not paying off in full on time.

Just setup a DD for the full balance and then leave it alone, so long as you have the money in your account there is no issue.