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Error in Calculation of Credit Card Interest?

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modellingman
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Error in Calculation of Credit Card Interest?

#265180

Postby modellingman » November 18th, 2019, 3:55 pm

I have an M&S credit card which is usually paid off in full each month. On the latest statement dated 29/10/2019, an interest charge of £30.38 was applied. On investigation it turned out that I had underpaid the preceding statement (dated by 29/09/2019) £0.40 (40 pence). The balance due on that statement was £522.44 and I had only paid £522.04.

The payment was made on the due date (24/10/2019) and the later statement confirms the payment was credited to the account on the date of payment. The amount of interest seemed a little on the high side to me (approximately 75 times the amount of the underpayment) so I decided to have a go at calculating it myself.

My results (available here at https://1drv.ms/x/s!AlDfB7S22iZ3g5lQxbShDMaNGTRmjg for anyone who is really interested) were less than half those shown on the statement of 29/10/2019. These results were based on the following taken from various bits of the statements

Interest Rates
Purchases and charges - 18.9%pa, 1.456% per month
Cash advances - 23.9%, 1.809% per month

Interest charging information You will not pay interest on purchases if you pay your balance in full and on time each month. Otherwise, the period over which interest is charged will be as follows: for Purchases, balance transfers, cash advances and cash related payments - from date debited to your account until paid in full

Allocation of payments If the amount you pay in a month is less than the full amount you owe, we will apply the amount you pay in the following order:
(a) any unpaid arrears or amounts over the credit limit;
(b) the amount you owe us and shown in your statement;
(c) any transactions, interest or charges not yet included in a statement.
We will apply your payment first to amounts on your account which we charge at the highest interest rate followed by amounts we charged at lower rates. In each case, interest and charges are paid off first. If some amounts are charged at the same interest rate, we will apply your payment to the oldest amounts first.

How Interest is charged
On purchases

We don’t charge interest on purchases if you pay your balance in full by the due date (and you’ve also paid the previous month’s balance in full by that due date). If you do not pay the balance in full, we charge interest on all transactions from the date they were added to the account (not just on the unpaid balance).
...
Daily interest
Interest is charged on a daily basis, so the amount of interest payable will increase the longer payment is delayed, even if payment is made before the due date. Payments will take effect when they are actually received by us as cleared funds.


Like many institutions, M&S don't make it easy to deal with them other than by phone. I didn't really fancy trying to explain my calculations over the phone, so I sent them the following via the messaging facility made available through the online access provided to the account.

I am having some difficulty understanding the charge of £30.38 that was applied to my statement dated 24 October.

Whilst I am highly annoyed that an underpayment of £0.40 has incurred an interest charge of approximately 75 times this amount, I accept that you are entitled to charge interest because the amount showing on the previous statement was not paid off in full.

If I understand your policy on interest charges correctly, the amount of interest charged is based on the 12 purchases showing on my statement dated 29 September and the 2 purchases on the statement dated 24 October, with interest being charged between the date of the purchase and the date of the October statement (ie 24 October 2019).

I have calculated the interest due on these purchases based on the stated annual rate of 18.9% and my calculations are set out below.

Code: Select all

Date          Value   Days  Simple   Compound
29/08/2019    £56.90   57   £1.679   £1.559
30/08/2019    £33.00   56   £0.957   £0.888
03/09/2019    £15.30   52   £0.412   £0.382
04/09/2019    £21.90   51   £0.578   £0.536
04/09/2019    £50.50   51   £1.334   £1.236
04/09/2019    £53.00   51   £1.400   £1.298
04/09/2019   £126.96   51   £3.353   £3.108
07/09/2019    £34.63   48   £0.861   £0.797
07/09/2019    £57.83   48   £1.437   £1.332
13/09/2019    £10.28   42   £0.224   £0.207
15/09/2019    £15.65   40   £0.324   £0.300
14/09/2019    £46.49   41   £0.987   £0.913
15/10/2019   £144.86   10   £0.750   £0.689
23/10/2019   £135.95    2   £0.141   £0.129
Totals       £803.25       £14.437  £13.374



The Date column is the "Date of Transaction" rather than the later "Date Applied" and the Days column is the number of days between this Date and 24 October 2019 and is inclusive of both dates. The Simple column is the value of the interest calculated on the simple basis of daily interest rate multiplied by number of days, where the daily interest rate is the the annual rate divided by 365. The Compound column uses a compound interest calculation based on a compound daily rate of 0.04744%.

As you can see I calculate the interest chargeable as being £14.44 on the simple basis and £13.37 on the compound basis - each of these is less than half that which has actually been added to my statement. My totals can only be reconciled to the actual value of £30.38 if a further 38 days of interest are added to each transaction (using the simple interest basis) or 44 days (on the compound basis).

I shall be grateful for an explanation. An Excel workbook containing the details of my calculations can be found at
https://1drv.ms/x/s!AlDfB7S22iZ3g5lQxbShDMaNGTRmjg


M&S have, predictably, knocked the interest charge off my account. However, as my message to them shows, I didn't actually ask them to do this, rather I asked them to explain their interest calculation. An explanation which, to date, has not been provided.

Unless I'm missing something, it does seem rather odd that M&S's interest charge is so much higher than the one I have calculated. If anyone has any ideas or an explanation for this then I'd be happy to hear them. I would also add: there was no interest showing on the earlier September statement (because the preceding August statement was paid off in full before its due date); all transactions were either purchases or payments; and, transactions on M&S statements each have two dates a Date of Transaction and a Date Applied which is generally a day later (except for payments when the dates are the same).

GoSeigen
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Re: Error in Calculation of Credit Card Interest?

#265392

Postby GoSeigen » November 19th, 2019, 11:30 am

modellingman wrote:Unless I'm missing something, it does seem rather odd that M&S's interest charge is so much higher than the one I have calculated. If anyone has any ideas or an explanation for this then I'd be happy to hear them. I would also add: there was no interest showing on the earlier September statement (because the preceding August statement was paid off in full before its due date); all transactions were either purchases or payments; and, transactions on M&S statements each have two dates a Date of Transaction and a Date Applied which is generally a day later (except for payments when the dates are the same).


I can't see an obvious explanation, but were there definitely no transactions between 14 Sep and 15 Oct?


GS

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Re: Error in Calculation of Credit Card Interest?

#265532

Postby modellingman » November 19th, 2019, 6:07 pm

GoSeigen wrote:
modellingman wrote:Unless I'm missing something, it does seem rather odd that M&S's interest charge is so much higher than the one I have calculated. If anyone has any ideas or an explanation for this then I'd be happy to hear them. I would also add: there was no interest showing on the earlier September statement (because the preceding August statement was paid off in full before its due date); all transactions were either purchases or payments; and, transactions on M&S statements each have two dates a Date of Transaction and a Date Applied which is generally a day later (except for payments when the dates are the same).


I can't see an obvious explanation, but were there definitely no transactions between 14 Sep and 15 Oct?


GS


Thanks for taking the time and trouble to respond.

There are no missing transactions. I was out of the UK for four weeks from mid-Sep to mid-Oct and card was not used abroad and no transactions showing on M&S statements for the period I was away.

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Re: Error in Calculation of Credit Card Interest?

#265619

Postby paulnumbers » November 19th, 2019, 11:11 pm

modellingman wrote:I have an M&S credit card which is usually paid off in full each month. On the latest statement dated 29/10/2019, an interest charge of £30.38 was applied. On investigation it turned out that I had underpaid the preceding statement (dated by 29/09/2019) £0.40 (40 pence). The balance due on that statement was £522.44 and I had only paid £522.04.

The payment was made on the due date (24/10/2019) and the later statement confirms the payment was credited to the account on the date of payment. The amount of interest seemed a little on the high side to me (approximately 75 times the amount of the underpayment) so I decided to have a go at calculating it myself.

My results (available here at https://1drv.ms/x/s!AlDfB7S22iZ3g5lQxbShDMaNGTRmjg for anyone who is really interested) were less than half those shown on the statement of 29/10/2019. These results were based on the following taken from various bits of the statements

Interest Rates
Purchases and charges - 18.9%pa, 1.456% per month
Cash advances - 23.9%, 1.809% per month

Interest charging information You will not pay interest on purchases if you pay your balance in full and on time each month. Otherwise, the period over which interest is charged will be as follows: for Purchases, balance transfers, cash advances and cash related payments - from date debited to your account until paid in full

Allocation of payments If the amount you pay in a month is less than the full amount you owe, we will apply the amount you pay in the following order:
(a) any unpaid arrears or amounts over the credit limit;
(b) the amount you owe us and shown in your statement;
(c) any transactions, interest or charges not yet included in a statement.
We will apply your payment first to amounts on your account which we charge at the highest interest rate followed by amounts we charged at lower rates. In each case, interest and charges are paid off first. If some amounts are charged at the same interest rate, we will apply your payment to the oldest amounts first.

How Interest is charged
On purchases

We don’t charge interest on purchases if you pay your balance in full by the due date (and you’ve also paid the previous month’s balance in full by that due date). If you do not pay the balance in full, we charge interest on all transactions from the date they were added to the account (not just on the unpaid balance).
...
Daily interest
Interest is charged on a daily basis, so the amount of interest payable will increase the longer payment is delayed, even if payment is made before the due date. Payments will take effect when they are actually received by us as cleared funds.


Like many institutions, M&S don't make it easy to deal with them other than by phone. I didn't really fancy trying to explain my calculations over the phone, so I sent them the following via the messaging facility made available through the online access provided to the account.

I am having some difficulty understanding the charge of £30.38 that was applied to my statement dated 24 October.

Whilst I am highly annoyed that an underpayment of £0.40 has incurred an interest charge of approximately 75 times this amount, I accept that you are entitled to charge interest because the amount showing on the previous statement was not paid off in full.

If I understand your policy on interest charges correctly, the amount of interest charged is based on the 12 purchases showing on my statement dated 29 September and the 2 purchases on the statement dated 24 October, with interest being charged between the date of the purchase and the date of the October statement (ie 24 October 2019).

I have calculated the interest due on these purchases based on the stated annual rate of 18.9% and my calculations are set out below.

Code: Select all

Date          Value   Days  Simple   Compound
29/08/2019    £56.90   57   £1.679   £1.559
30/08/2019    £33.00   56   £0.957   £0.888
03/09/2019    £15.30   52   £0.412   £0.382
04/09/2019    £21.90   51   £0.578   £0.536
04/09/2019    £50.50   51   £1.334   £1.236
04/09/2019    £53.00   51   £1.400   £1.298
04/09/2019   £126.96   51   £3.353   £3.108
07/09/2019    £34.63   48   £0.861   £0.797
07/09/2019    £57.83   48   £1.437   £1.332
13/09/2019    £10.28   42   £0.224   £0.207
15/09/2019    £15.65   40   £0.324   £0.300
14/09/2019    £46.49   41   £0.987   £0.913
15/10/2019   £144.86   10   £0.750   £0.689
23/10/2019   £135.95    2   £0.141   £0.129
Totals       £803.25       £14.437  £13.374



The Date column is the "Date of Transaction" rather than the later "Date Applied" and the Days column is the number of days between this Date and 24 October 2019 and is inclusive of both dates. The Simple column is the value of the interest calculated on the simple basis of daily interest rate multiplied by number of days, where the daily interest rate is the the annual rate divided by 365. The Compound column uses a compound interest calculation based on a compound daily rate of 0.04744%.

As you can see I calculate the interest chargeable as being £14.44 on the simple basis and £13.37 on the compound basis - each of these is less than half that which has actually been added to my statement. My totals can only be reconciled to the actual value of £30.38 if a further 38 days of interest are added to each transaction (using the simple interest basis) or 44 days (on the compound basis).

I shall be grateful for an explanation. An Excel workbook containing the details of my calculations can be found at
https://1drv.ms/x/s!AlDfB7S22iZ3g5lQxbShDMaNGTRmjg


M&S have, predictably, knocked the interest charge off my account. However, as my message to them shows, I didn't actually ask them to do this, rather I asked them to explain their interest calculation. An explanation which, to date, has not been provided.

Unless I'm missing something, it does seem rather odd that M&S's interest charge is so much higher than the one I have calculated. If anyone has any ideas or an explanation for this then I'd be happy to hear them. I would also add: there was no interest showing on the earlier September statement (because the preceding August statement was paid off in full before its due date); all transactions were either purchases or payments; and, transactions on M&S statements each have two dates a Date of Transaction and a Date Applied which is generally a day later (except for payments when the dates are the same).



Well, as you have found out, finance companies would rather just pay you to shut up, rather than have someone who can work out interest look at your case. Then they'd need someone with A-level maths, and I don't suppose it makes economic sense for them to spend an hour on it.


I tried out the broker, Trading 212, who claim not to charge any brokerage fee's or FX charge for foreign shares. Each time I purchased foreign shares, a little bit of money would go missing. Sometimes just a few pence, sometimes more. Each time I queried it, they refunded me the difference. It continued to happen, and I decided to close my account in the end. Who can be bothered to go asking for loose change after every trade? Who knows the cause of your problem with M&S, or the problem with Trading 212, those that keep a close eye on their finances soon have their mouths stuffed with gold and they go away!

I checked your first calculation for interest and it looks spot on to me, so assuming all your assumptions are correct, I assume you're in the right.

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Re: Error in Calculation of Credit Card Interest?

#265661

Postby Gan020 » November 20th, 2019, 7:47 am

modellingman wrote:
How Interest is charged
On purchases

We don’t charge interest on purchases if you pay your balance in full by the due date (and you’ve also paid the previous month’s balance in full by that due date). If you do not pay the balance in full, we charge interest on all transactions from the date they were added to the account (not just on the unpaid balance).


This is a bid odd imho. We don't charge interest if you pay by the due date AND you paid the previous months bill in full. What's the previous months bill got to do with it? I wonder whether (and this seems absurb) they are charging interest on your previous month's bill -i.e. the one you paid in full! as well

Which might come to about the right number if you spend about the same each month.

Or are they charging interest for the forward month that hasn't yet arrived on the basis the 40p won't get cleared (and therefore there's more interest to come on the next bill but they prefer to put it on this bill) until you make the payment in a months time by the next due date.


I would suggest given the size of the "error" it's nothing to do with roundings but something more fundamental.


As an aside I'm afraid there's far too much of this sort of thing these days. Something thinks they are being clever, they collect lots of interest for years with the company making lots of profits and directors earning lovely bonuses and then eventually somebody is motivated enough to expose it and then the claim companies persue them for years, directors move on but keep their pay. I'm sure if you have the motivation and can get to the bottom of it, Martin Lewis would be interested enough to run an article.

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Re: Error in Calculation of Credit Card Interest?

#265849

Postby modellingman » November 20th, 2019, 5:43 pm

paulnumbers wrote: Well, as you have found out, finance companies would rather just pay you to shut up, rather than have someone who can work out interest look at your case. Then they'd need someone with A-level maths, and I don't suppose it makes economic sense for them to spend an hour on it.

I tried out the broker, Trading 212, who claim not to charge any brokerage fee's or FX charge for foreign shares. Each time I purchased foreign shares, a little bit of money would go missing. Sometimes just a few pence, sometimes more. Each time I queried it, they refunded me the difference. It continued to happen, and I decided to close my account in the end. Who can be bothered to go asking for loose change after every trade? Who knows the cause of your problem with M&S, or the problem with Trading 212, those that keep a close eye on their finances soon have their mouths stuffed with gold and they go away!

I checked your first calculation for interest and it looks spot on to me, so assuming all your assumptions are correct, I assume you're in the right.


Thanks for the observations. I have messaged M&S again, thanking them for the refund of interest and pointing out that the previous message had not actually asked for this but had asked for an explanation of how they had arrived at their interest charge. Their policy is to respond within 2 working days, so the clock is ticking. Should I get a response I'll no doubt enlighten the board with it.

Gan020 wrote:This is a bid odd imho. We don't charge interest if you pay by the due date AND you paid the previous months bill in full. What's the previous months bill got to do with it? I wonder whether (and this seems absurb) they are charging interest on your previous month's bill -i.e. the one you paid in full! as well

Which might come to about the right number if you spend about the same each month.

Or are they charging interest for the forward month that hasn't yet arrived on the basis the 40p won't get cleared (and therefore there's more interest to come on the next bill but they prefer to put it on this bill) until you make the payment in a months time by the next due date.

I would suggest given the size of the "error" it's nothing to do with roundings but something more fundamental.

As an aside I'm afraid there's far too much of this sort of thing these days. Something thinks they are being clever, they collect lots of interest for years with the company making lots of profits and directors earning lovely bonuses and then eventually somebody is motivated enough to expose it and then the claim companies persue them for years, directors move on but keep their pay. I'm sure if you have the motivation and can get to the bottom of it, Martin Lewis would be interested enough to run an article.


Thanks for your comments. Since my OP, I have modelled a number of scenarios but none gets me close to the £30.38 interest charge that appeared on my October statement. The preceding month's statement (for August and dated 29/8/2019) was paid off in full but included purchases over three times the level showing for September. Including additional interest for the August purchases from the date of purchase to paying them off in full (on 21/09/2019) increases my calculated value of the interest to around £40. So whilst it was an interesting hypothesis that interest was also being charged on the preceding month's purchases that doesn't appear to be the case. Similarly, I've assessed the effect of your suggestion of the possibility of future interest being included but, because the October purchases are low, this only increases the interest charge by about £5, nowhere near enough to bridge the gap up to M&S' figure.

I agree with your aside and I think there is a point of principle at stake here. If M&S' statements are wrong for me, then presumably they are wrong for a lot of other people. I spent 30 years of my career in what is sometimes now termed analytics. If I can't make sense of M&S' interest calculation on the basis of what they put on their statements, then I suspect few others can either. I'm retired and at the moment have time aplenty. Assuming M&S stonewall me in my search for an explanation, I was starting to think about where to turn next. Financial journalists might be persuaded to take an interest and your suggestion of Martin Lewis seems excellent. This is not just interest, this is M&S interest make might a catchy headilne!


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