• Choosing your Credit Card

• Terms and Conditions

• Annual Percentage Rate
• Introductory Rates
• Interest Free Period
• Interest Calculations
• Making Payments
• How Payments Applied
• Minimum Repayments
• Fees
• Default Charges

• What happens to your application?

• Using your Credit Card

• Trouble with Debt?

• Resources

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Average Daily Balance Method

The average daily balance on your credit card is the balance you carried during your statement period, averaged by the number of days in the statement period (usually 30 or 31). It is calculated at the end of the month by adding the balance at the end of each day, then dividing the total by the number of days in the billing period.

Generally speaking, to calculate the interest charged for the month you multiply the average daily balance by the daily interest rate (obtained by taking the annual interest rate and dividing by the number of days in the year), then multiply the result by the number of days in the billing period.

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Daily Balance Method

Where the average daily balance method only makes a month-end calculation of the interest owed, the daily balance method calculates interest owed at the end of each day of the billing period.

To calculate the daily interest charge you multiply the daily balance by the daily interest rate (obtained by taking the annual interest rate and dividing by the number of days in the year). Then add up the resulting daily interest charges to obtain the amount of interest charged for the month.

The following examples show how the two methods work.

Mr X receives a new credit card on 1 March. On 5 March he makes a purchase of £3,000. His March statement, which covers the period between 1 March and 31 March (a 31 day billing period), has a payment due date of 19 April.

Let's assume that:

• Mr X didn't pay his bill in full, by the due date, meaning that the interest free period doesn't apply to his purchase (for an explanation as to why see the section on when the interest-free period applies)
• Interest is charged from the purchase date of 5 March
• Mr X didn't buy anything on his credit card during April. When his April statement arrives it shows an interest charge of approximately £41.00, based on an annual interest rate of 18.5%. If we divide 18.5% by 365 we arrive at a daily interest rate of 0.05068%.

	Average Daily Balance Method	Daily Balance Method
1 March to 4 March - no transactions	£0 for 4 days	£0 x (0.05068%) = £0 £0 x 4 days = £0
March 5 to 31 March - purchase of £3,000	£3,000 for 27 days	£3,000 x (0.05068%) = £1.52 £1.52 x 27 days = £41.05
Calculation of average daily balance	(£0 x 4 days) + (£3,000 x 27 days) 31 days in the billing period = average daily balance of £2,612.90	Not applicable
Total interest charged in April	Average daily balance x daily interest rate x number of days in the billing period = £2,612.90 x 0.05068% x 31 days = £41.05	£0 + £41.05 = £41.05

As you can imagine, in cases where you are making lots of transactions and payments, this calculation can quickly become quite complex.

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The Length Of The Interest Free Period

You usually benefit from an interest-free period when you buy something with your credit card as the card company doesn't start charging you interest on your purchases right away. In other words, you are getting credit without having to pay for it, making credit cards a very good and cost-effective way to purchase goods. However, the interest-free period doesn't always apply to new purchases, unless you pay in full every month. The interest-free period has two parts:

• the time between the purchase and your statement date
• the time between your statement date and your payment due date.

The maximum length of the interest free period is shown in the Summary Box. In the UK the interest-free period can be as long as 59 days but generally only applies if certain conditions are met (see next section).

You don't normally get an interest-free period on cash advances, credit card cheques or balance transfers. With these transactions interest is normally charged immediately. This is because you are effectively borrowing cash, from your card company, from the moment it is withdrawn or the balance is transferred.

Examples:

• Mr X's statement covers transactions he made between 1 May and 31 May
• Mr X made a new purchase on 5 May
• Mr X's payment due date is 19 June
• Mr X pays the full balance by 19 June.

Start of billing period: 1 May	Purchase date: 5 May	End of billing period (statement date): 31 May	Payment due date: 19 June
5 days	26 days		19 days
	The interest-free period on Mr X's 5 May purchase is: 26 days + 19 days = 45 days (NB: the maximum interest-free period is 5 days + 26 days + 19 days = 50 days)

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Whether The Interest-Free Period Applies To All Purchases

Credit card companies tend to use one of two methods to decide whether the interest-free period applies to your new purchases.

• Method A: The interest-free period applies to your new purchases only if you pay your current month's balance in full, by the due date.
• Method B: The interest-free period applies to your new purchases only if you pay your current month's balance in full, by the due date and you have also paid your previous month's balance in full, by the due date (in other words, you are not carrying a balance from the previous month).

Example:

Let's assume that Mr X didn't pay his April balance in full, so he carried a balance of £2,000 from that month.

On 5 May he made a new purchases of £1,000. He paid his new balance of £3,000 (£2,000 + £1,000) in full, by the due date shown on his statement of 19 June. Here's how the two methods would affect him.

• Under Method A Mr X would only have to pay interest on the £2,000 carried over from April. He will get the interest-free period on his new purchase of £1,000 because he paid his current balance in full by the due date of 19 June.
• Under Method B Mr X would have to pay interest on the £2,000 carried over from April and on the new purchase of £1,000 (i.e. the full £3,000), because he carried a balance over from April.

The rules on when the interest-free period applies are shown in the Summary Box.

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When The Interest Calculation Starts

Different credit card companies will calculate interest on a transaction from different points in time, either the Transaction Date or the Posting Date.

•  The Transaction Date is the date of the purchase. For example, if you bought a CD player on 1 March then 1 March is the Transaction Date.

The Posting Date is the date that a transaction reaches your account. Sometimes a shop will collect credit card transactions over a period (perhaps several days) and then process them all at once, so there can be a delay before the transaction reaches your account.

Most UK credit card companies charge interest from the Transaction Date. There is a slight advantage to you if your credit card company charges from the Posting Date as it means the transaction reaches your account later, but this is only likely to affect a very small number of the transactions you make.

Detail on when the interest calculation starts are shown in the Summary Box.

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When The Interest Calculation Stops

Different credit card companies will stop charging interest on the amount being repaid at different points, either the Payment Transaction Date or the Posting Date, until the balance is repaid in full, when funds are cleared or when payment is made in full on the previous statement date.

• The Payment Transaction Date is the date you made the payment at a bank or when the credit card company received your payment.
• The Posting Date is the date when your payment is credited to your account.
• Funds are cleared when the card company is certain that your payment will not be returned for any reason.

The earliest date interest could stop, when a full payment is made, is the statement date preceding the payment.

There is an advantage to you the earlier your credit card company stops charging you interest. Your card company will provide detail on when the interest calculation stops in the Summary Box.

If you repay your Outstanding Balance in full, you may qualify for an Interest-Free period (see section on "Whether The Interest-Free Period Applies to All Purchases").

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Whether Residual Interest Is Charged

If you pay off your balance in full some credit card companies will still charge you interest on the amount borrowed during the month in which you make your payment, assuming you carried forward a balance from the previous month. This is known as residual interest. In other words, if you carried a balance over from April, have paid your May statement in full and make no further purchases during June, you may still see interest charged on your June statement for the Outstanding Balance between the date of your May statement and the date that your credit card company treats your repayment as being made (see section on "When the Interest Calculation Stops").

Your card issuer may choose to waive the residual interest.

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