Interest-free day calculations on credit cards are so complex and poorly disclosed it is no wonder they provide a rich stream of revenue for the banks. About $6 billion in interest payments runs into the coffers of the banks and other financial institutions each year from credit cards.

”I’m yet to see a clear and concise explanation from any of the banks, even though that was one of the stated aims of the 2012 credit card reforms,” says Andrew Duncanson, of comparator site Mozo.

When the cardholder does not pay off a statement in full and on time, lenders charge interest on the whole balance, usually back to the date of the purchase, which could be nearly two months earlier, Duncanson says.

Also, if full payment is made only a day late, the interest is usually backdated to the purchase date, on the whole balance, he says.

Retiree Ken Pheeney, 66, from Bundaberg, was not aware of how the interest-free period worked until he learned the hard way. He had a debt of $2000 on his card and paid off all of the debt but $50 by the due date.

”I got charged the interest on $2000 even though I was $50 short,” he says. He was hit with an interest charge of more than $50. Ken rang the bank to complain and it was only then that he realised that interest was charged on the whole $2000 even though he owed only $50 on the card. After he complained, the bank waived the interest charge as he usually paid off the card debt in full by the due date. If only half of the $2000 is paid off by the due date, Mozo calculates the cardholder would pay up to $88 in interest under the worst-case scenario.

If the cardholder paid off the full balance of $2000, but one day late, Mozo calculates the cardholder would pay interest of up to $73. Some cards backdate interest only to the start of the current month, but most go all the way back to the purchase dates.

To make matters worse, with most cards, the cardholder also loses their interest-free period on subsequent purchases, Duncanson says.

In the example, interest on the $1000 is carried forward into the next statement period. Cash advances start accruing interest, which is usually higher than the purchase interest rate, when the cash is withdrawn or transferred online. Mozo says the average interest charged on purchases is 17.3 per cent and usually higher for cash advances. ”It’s so complicated that most people won’t ever get their head around the subtle differences,” Duncanson says.

”The best advice is to always pay off your full balance, on time,” he says. For those who pay off the balance in full by the due date and do not make cash advances, there will be no interest charges. Duncanson says if the cardholder is unable to pay off the balance in full by the due date they should shop around for a card with a low interest rate.

With the changes to credit reporting rules, missing a payment has greater implications than just interest charges. Under the new rules, more information is held on credit records, including credit card repayment history.

For example, a minimum credit card payment more than five days late will be recorded. A poor record could make it harder to get a loan.

”Another thing that trips up people is balance transfers with zero rates,” Duncanson says. These offer a low or zero interest rate on the debt that is transferred from the old card. But the low or zero interest rate is usually applied on the transferred balance for a certain period, after which the purchase or cash advance interest rate is charged, Duncanson says. ”There will be no interest-free period on purchases until the balance is paid off in full,” he says.

Posted by John Collett – The Age on 5th March, 2014