en-us http://backend.userland.com/rss Your Friends @ Myvesta.org.uk (stever@myvesta.org) myvestaukblog_archive.html stever@myvesta.org 114349285024900389 1 Annual percentage rate

Credit card companies are required by law to display a card’s annual percentage rate (APR), which is supposed to show the total annual cost a customer has to pay for credit.

2 The same, but different

However, just because two cards have the same advertised APR, this does not mean that they cost the same in interest charges. Credit card companies use 14 different methods for calculating interest.

3 Highs and lows

A card with a lower APR can end up costing more in interest charges than one with a higher APR. For example, if you borrow £2,800 over a year and pay your bill in full only every four months, a cahoot card with an APR of 11.8 per cent will cost you £40 in interest, while an HSBC credit card with an APR of 13.9 per cent will cost you £38.

4 Buying time

Although it takes a few days for a purchase to clear, most companies charge interest from the date the transaction was made. A few card issuers, such as Liverpool Victoria and Saga, wait until the transaction has cleared. This makes these cards cheaper.

5 Interest on interest

Most credit card companies charge interest on the interest that cardholders have accrued in previous months. For example, if you owed £100 one month and were charged £2 interest, you will be charged interest on £102 the next month, plus charges for any additional spending. Egg and Tesco charge interest only on new transactions.

6 Read the small print

Some cards will charge you interest on a monthly balance, even if you have cleared it in full, if you failed to repay the previous month’s balance in full. Such cards include Marks & Spencer’s &More card and NatWest’s credit card.

7 Minimum repayments

Credit card companies usually allow customers to make a minimum repayment of between 3 per cent and 5 per cent of the total balance each month. A customer with a £10,000 balance on a card that charges an APR of 15.9 per cent will pay a hefty £1,346.18 in interest over a year if he chooses to repay just 3 per cent of the balance each month. Dr Hunt says: “Paying back a smaller amount each month might seem to be a cheap way to borrow money but the effects of compound interest will quickly push up the overall cost.”

8 Saving graces

Compound interest works against debtors but in favour of savers. If you have money in a savings account, you earn interest on your interest. If you put £100 in a savings account that pays 6 per cent, you will earn £6 in one year. The following year, you will earn interest on £106.

9 Know your acronym

The annual equivalent rate (AER) is a formula to show how much interest you will earn in a year, whether your bank calculates interest daily, monthly or annually. This makes comparisons easier.

10 Monthly interest

Some account providers that pay interest monthly quote one interest rate for a product while account comparison services show another. For example, ING Direct quotes 4.5 per cent for its account while Moneyfacts shows 4.41 per cent for the same account. This is because Moneyfacts quotes the simple gross rate paid each month while ING Direct quotes the AER, which takes into account the effect of interest compounding monthly.

The Times