How do credit card charges work now?

Q I recently bought a car for ?4,600 using my NatWest gold credit card. There was an existing balance of ?800 on the card but I cleared most of the combined debt - around 83% of it - before the due date on the next statement. So imagine my shock when I was still charged interest for the full amount on the following statement!

When I queried this with the bank, I was told it was correct and, on checking the back of the statement, discovered the following: "It will be necessary for you to pay interest on the purchases listed overleaf if you do not pay the full balance or pay less than the full balance within 25 days of the date of this statement." I complained that this wasn't how the average customer understood the way in which interest is calculated - and a quick survey among my friends proved this to be the case.

GSR

A You're quite right - the average customer would expect to pay interest on the outstanding balance rather than the full debt after making payment. That's because that's precisely how it used to work. In the beginning, all credit cards operated in much the same way: the customer bought goods with the card, the card provider sent out a statement, the customer paid all or part of the bill and was then charged interest on the amount not paid off. Simple.

But increased competition between card providers and savage cuts in the rates of interest charged meant that providers had to look at new ways of marketing and operating their cards. And what that has largely meant is that there are now no less than five different ways in which card providers calculate interest on purchases:
1. Interest charged from the date the purchase is charged to the card account, if the balance is not cleared in full each month:
2. Interest charged from the statement date if account is not cleared in full each month
3. Interest charged from date of purchase if account not cleared in full each month
4. Interest charged from date of purchase even if account is cleared in full each month
5. Interest charged from date purchase is charged to the account even if account is cleared in full each month

Your card, which falls under category 3, has an interest-free period of 56 days but this only applies if you pay off your balance in full. Otherwise, interest is backdated to the purchase date.

Like you, I prefer the original arrangement, which seemed more in the nature of credit provision - you only pay interest on the amount of unpaid capital with a loan or a mortgage, for example - but the current operation is far more lucrative for card providers. Particularly if the average cardholder doesn't realise just how much interest he is being charged.