Key Post How credit card interest is calculated. How to get an interest-free period.

[TarfHead]

Can anyone clarify something for me please about credit card interest ?

Assume I have an outstanding balance on a card of EUR 1,000.00. At the date the bill is due to be paid, I make a payment of EUR 800.00.

Because the bill has not been cleared, I now am liable to have interest charged to the bill.

1. Is the interest calculated on the full amount (EUR 1,000), or the shortfall (EUR 200 (1000-800)) ?

2. If on the full amount, is there any benefit from making the payment at all ?

 

[Brendan Burgess]

Check your terms and conditions . Here is the AIB Credit Card which I think is standard

"Interest 52. Interest will not be charged if you pay the full Balance shown on your current Statement by the payment due date shown on the Statement and additionally you have paid the full Balance shown on your previous Statement by the payment due date shown on that Statement. The interest rate for purchases and cash advances being applied to an Account will be notified to you on the Statement. We calculate interest using the interest rate as at the date of your Statement, and interest is calculated using the average daily balance since the date of your previous Statement


53. If the full balance is not repaid by the payment due date shown on your Statement, interest is charged on the full balance from the date the Transaction was debited to the Account, as shown on your Statement, until full repayment is credited to the Account. Interest on Balance Transfer transactions will be charged from the date the transaction was debited to the Account until full repayment is made.

54. Subject to Condition 52 above, interest will be payable on all amounts owing to us on the Account. Interest will accrue (as well after judgement or demand as before) on a daily basis at the current (variable) rate advised to you. Interest will be charged to the Account monthly. In respect of Transactions, interest will accrue and be charged from the date it is debited to your Account (this appears on your Statement as the posting date) to the date full payment is received and credited to the Account. Where a part payment is made, interest will continue to accrue and be charged on the remaining balance up to and including the date of the next Statement, when the interest for the period will be debited to the Account. If you pay the full Balance on your current Statement but have not paid the full Balance on your previous statement you will be charged interest. Interest will be calculated on the amount unpaid on your previous Statement."

So what does this mean?

The best way to think of it is that AIB charges interest on the balance outstanding on your credit card just like any ordinary bank account.

If you buy something, it increases the balance and so the daily interest charged rises.
If you make payment to your credit card, it reduces the balance and so reduces the daily interest charged.

However, if you pay the balance inf ull two months in a row, no interest is charged.

(for convenience, I have used a rate of 12% and I have used monthly calculations of interest.
In practice, the rate is much higher, and interest is calculated daily)


So, yes, you are better off paying €800 off your balance as it stops interest accruing on that €800.

But you will be charged a full month's interest on the €1,000.

This is how AIB Visa should describe how they charge interest

"We will calculate interest every day on the balance outstanding on your Visa card.
It will be charged to your account once a month.
If you pay money off your account, this will reduce the balance outstanding and consequently, will reduce the interest charged.

By the way...

If you pay off your balance in full
and
If you pay off your balance in full the second month, we won't charge you any interest the second month"

 

[TarfHead]

The wording seems contradictory. It seems to suggest that they continue charging interest on the €1,000 until you have paid off the €800 and you subsequently pay off the €200, but this is not the way it's done.

After reading the BOI Mastercard T&C, and an unsatisfactory phone call to customer service, I believe I can answer my own questions;

1. Interest is charged on the full amount, i.e. 1000
2. With regard to interest, there is no advantage in paying the 800. It does not reduce the interest charged.

However, paying the 800 on the due date may avoid incurring a late payment charge. Also, getting the 800 into my credit card account, and out of my reach for other uses, may be of benefit in the long run .

 

[Brendan Burgess]

2. With regard to interest, there is no advantage in paying the 800. It does not reduce the interest charged.

Hi Tarfhead

I doubt if this is correct. Can you post the terms and conditions.

I have edited my response to your post, to add in the following condition which confirms my understanding.

In respect of Transactions, interest will accrue and be charged from the date it is debited to your Account (this appears on your Statement as the posting date) to the date full payment is received and credited to the Account. Where a part payment is made, interest will continue to accrue and be charged on the remaining balance up to and including the date of the next Statement, when the interest for the period will be debited to the Account.

So a part payment reduces the ongoing interest, which is what I thought.

 

[TarfHead]

I doubt if this is correct. Can you post the terms and conditions.

OK, happy to be wrong .

Downloaded from [broken link removed].

If you repay us everything you owe us on the Account as shown on a monthly statement by the payment date we specify in the monthly statement, we will not charge you interest on any purchases or cash advances shown in that monthly statement. Otherwise, you forfeit the interest free period and we will charge interest, including interest on each purchase, cash advance, unpaid cash advance fee and cross border handling fee from the date of the transaction. We charge such interest at the rate we show you on your latest monthly statements. This rate may differ from the rate in force on the date of the cash advance or purchase.

My reading of this is that not paying the full repayment counts as 'forfeit the interest free period'. When I phoned customer service, I was given the same message, namely that interest is charged on the full amount, and not the net.

 

[Brendan Burgess]

Hi Tarfhead

This is wrong

2. With regard to interest, there is no advantage in paying the 800. It does not reduce the interest charged.

Paying only €800 means you forfeit the interest free period.

but paying €800 stops further interest being charged on the €800. From the day you pay the €800, you are being charged interest on only the €200 remaining.

 

[TarfHead]

This is wrong

..

From the day you pay the €800, you are being charged interest on only the €200 remaining.

Maybe

Maybe not ? What I posted tallies with what I was told by customer services.

My understanding is that the final amount on a bill is not one figure against which one interest amount is calculated. Instead, each transaction is like an individual bill and each transaction accrues interest based on its value, and its date.

Say the 1000 bill is for July and comprises 2 transactions. 500 on 01 July and 500 on 31 July. The interest accrued is based on 500 for 31 days and 500 for one day. If I pay 800, does that wipe out the first 500 and 300 of the second, or vice-versa ?

From a customer perspective, the method that reduces the interest payable is the one to use. But credit cards are profitable for banks so it's more likely that the calculation is skewed in the banks' favour.

And when the amount paid cannot be cleanly matched against individual transactions, how is the payment 'allocated' against transactions ?

All of the above, and what I was told over the phone, leads me to believe what I have already posted. Namely that the amount paid, if an underpayment, does not affect (reduce) the interest to be charged.

Unless it does