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Jamie Explains ... Interest
VISA, Money, Credit

Apparently interest is difficult for people to understand, so here's how it's calculated, by many banks (including mine).

Interest is not charged if you pay the full balance of a statement by the due date on that statement. Cleared funds must be received on the account, and as such, payment must be made several days in advance in order to ensure that your payment is received on time.

Interest is typically not charged on transactions on the current statement. Exceptions to this include balance transfers (which attract interest from the date of the transaction), cash advances, and balance transfers which have expired during the time period covered by the statement.

For example, a transaction on the 15th of January will appear on your February 1st statement. You will not be charged interest on this provided you pay the full balance of the February statement. However, a cash advance on the 15th of January will add to the interest charged on your February statement.

Payments to your account are applied as follows:

  1. Overdue payments

  2. Minimum payments on special balances

  3. Minimum payments on ordinary balances

  4. Special balances

  5. Ordinary balance

Special balances are paid off in the order in which they were applied to your account - therefore, your oldest balance transfers are paid off first, in turn, until you have none left, at which point payments are taken against your purchases.

Interest is calculated in two parts. The first part is calculated on the transactions on the previous statement. Using the previous example, imagine the transactions on 15th January were not paid off by the due date of February's statement. On the March statement, interest would be applied to the account. This is charged on all the transactions, for the period of time they are on the account. The second part is calculated on the whole balance of the account over the last statement period. Let us say the account history looks like this:

Jan 15th: £100 purchase
Feb 1st : Statement - current balance is £120
Feb 12th: £50 payment
Mar 1st : Statement - current balance is £70

Interest is charged on £100 for the initial 17 days that it is on the account. It is then charged on the balance of £120 for the 11 days that is on the account. Then interest is charged on the remaining £70, for the remaining 20 days.

Daily interest is calculated by taking your monthly rate, multiplying by 12, and dividing by 365. Therefore, a monthly rate of 1.385% equates to 0.0455% per day.

Your total interest charge is calculated by taking the sum of the each day's balance multiplied by the daily rate. So, in the example above:

£100 for 17 days @ 0.0455% = £0.77
£120 for 11 days @ 0.0455% = £0.60
£70 for 20 days @ 0.0455% = £0.64

This brings the total billed interest to £2.01.

Several factors can affect the amount of interest charged. For example, due to the nature of statement dates, the length of time between statements can vary between 28 and 34 days in some cases (for example). That means that a balance of around £1,000 will attract a good deal less in a 28-day-long statement period than in a 34-day-long statement period.

Bear in mind, in the example above, any transactions made during March will not attract interest this month. The pattern could just as easily look like:

Jan 15th: £100 purchase
Feb 1st : Statement - current balance is £120
Feb 10th: £10,000 purchase
Feb 12th: £50 payment
Mar 1st : Statement - current balance is £70

And the interest calculated on the March statement is still the same. This is because purchases have an interest free period. If they are not paid off by the due date on the statement on which they appear, interest on the following statement is calculated back from the date of the transaction. You get the general idea..

Right, any questions? :o)

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Sorry I didn't quite understand the bit about the thing with the whatsit, can you go through that all again?

Yes - when did you turn into a boring fuck?

You're just in a bad mood because TMA is getting more than you :oP


She's only after him for his body... err... his persona... errr.. I give up. Why?!

Wow, that's really interesting.
</extreme sarcasm>


Would you enjoy it more if I put in a token Star Wars reference? ;oP


Possibly. What's your point? ;)


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