Advice re How Credit Card Interest Works

Lemlin

Hi folks,

Wondered if I could get some help. I rang AIB for advice re this but the rep there said he couldn't give advice which I found amazing. I have an AIB click card. The interest rate is shown online as:

Annual Interest Rate -Purchases 9.11%
Representative Annual Percentage Rate - Purchases 13.6%

Basically, the way the card works, is that payment comes out on the 26th of each month for whatever was bought the month before. So, say, for example, if I buy something today, if I clear it off the card by February 26th I pay no interest. If I buy something on February 1st, I have until March 26th to pay it. I have always cleared the balance at this date so as to avoid interest. Amazingly I've had the card 8 years now and never paid a cent interest.

What I'm wondering is, what way does interest accrue? If I were to say, leave €100 on the card for, say, two months. What sort of interest would I be looking at? The annual interest rate is 9% so am I right in thinking that if I left €100 on the card for two months, I'd pay interest of only a few euro because one year's interest on €100 would only be €9?

Surely that can't be right though because I've always been told the interest amount on creit cards is huge?

I'm still amazed that the rep in AIB refused to dicuss this with me when I asked about it. I was only looking for a simple explanation off him of how the interest works.

whomitconcerns

if you have a sale/amount on your card still due after the payment date, you will be charged interest backdated to the date of the original sale. And in your case yes (nice rate seconded) would be probably a euro or so.

GarIT

Credit card interest is huge. 4% interest is huge. Also you pay interest on the interest in the second month. In your example you would be paying interest on €109 in the second month. That's what the representative rate is about, if you left €100 in for a year that's what it would work out as.

whomitconcerns

GarIT wrote: »

Credit card interest is huge. 4% interest is huge. Also you pay interest on the interest in the second month. In your example you would be paying interest on €109 in the second month. That's what the representative rate is about, if you left €100 in for a year that's what it would work out as.

Well he wouldnt owe 109€ after a month...more like €101 or so...about 0.75% per month

Lemlin

So if the 9.5% is yearly, I'd be looking at about 9.5% divided by 12 = 0.79% a month. So there'd be less than a euro added to the hundred euro each month?

GarIT

whomitconcerns wrote: »

Well he wouldnt owe 109€ after a month...more like €101 or so...about 0.75% per month

Yeah, my mistake, sorry. The 9.11% would be divided by 12 and payable monthly.

AlexisM

Lemlin wrote: »

...I've always been told the interest amount on creit cards is huge?..

Credit card interest rates can be huge - 20% isn't uncommon. Your 9% isn't particularly huge - about the same as a personal loan rate. People are usually advised to use loans/overdrafts rather than credit card debt because there's usually a big difference between loan rates and credit card rates - not the case with your card.

wench

whomitconcerns wrote: »

if you have a sale/amount on your card still due after the payment date, you will be charged interest backdated to the date of the original sale.

Additionally, you would usually be charged interest on the full billed amount, not just the outstanding amount.
So if your bill was €1000, and you pay €900, you don't just pay interest on the remaining €100.
Any spending from that point on would also incur interest, until such a point as you fully clear the bill again.