Check my arithmetic

In the first week of August I received my United Mileage Plus Visa monthly invoice from the current owner of the card business, Chase Bank.

The statement was for $1,241.93.  I am a terrible customer, I have always paid my bills in full and on time. This time I decided to see what happened if I only paid $1000.  What would the interest charges on $241.93 be?

You will not believe the interest rate. I guarantee you will not believe the interest rate that I have been charged.

I paid the $1000 of the $1,241.93 on time, online.  The first week in September the next invoice arrived. The new total due was $970.68 of which $241.93 was the balance from the previous invoice, $712.31 were new charges and the “finance charge” was $16.44. (Total $970.68)

The APR (Annual Percentage Rate) listed was 16.74% on an average balance of $1,155.68.

So what happened was that I wasn't charged interest on the $241.93 that I didn't pay, I was charged interest on the average balance of the whole $1,241.93 of which I paid $1,000.  The net annual interest on my $241.93 loan turned out to be $16.44  times twelve months equals $197.28 which is 81.5% interest.

Horrifying isn't it?  81.5% annual interest rate on a credit card.

“But wait” as the carnival pitchmen and TV high pressure sales people like to say..... I got the October invoice that showed I had paid the full $970.68 September invoice including interest payment on time. This time there was a new finance charge.  The new charges on the bill were $544.83 and the finance charge was $7.31 based on an average balance of $522.90. 

That means two things.  First, I am being charged interest on a month for which there is no prior outstanding loan balance.  I paid it off on time with interest.  Now I am being charged interest on a period for which there was no borrowing.  Second, adding the new $7.31 interest charge to the prior interest charge of $16.44 we get a total interest I am being charged of $23.75.  No other fees are involved but finance charges -- interest.

Times 12 that is $285.00 interest on a loan of $241.93.  The actual interest rate Chase Visa is charging me is 117.8%.

Rather high, wouldn't you say? 

As a key founder of Mastercard and a banker who devised many bank fees, I am appalled. I can not claim to have ever invented a way to charge people 117.8% interest and write a description of it that sounds legal and (this is the best part) claim the interest rate is 16.74%

It cost me $23.75 to find out that the real credit card interest rate is 117.8%.  You had better pay off your credit card bills immediately and never fail to pay on time.  I have suffered for you.

Comments

[Eric]

Well.. I know exactly what happened in this case. I work for Bank of America. We charge interest on revolving accounts (carry a balance each month). If you pay in full there is no finance charge, however, if there was a previous balance not paid in full..interest will be charged for 2 months consecutively, even if you pay in full. It is a priveledge to the customer to take advantage of having a Transacting account (pay in full, no finance charges on purchases). There is what is called RRFC.. retail residual finance charge, or trailing interest that takes effect if partial payment was made to the account. No also to the interest percentage that you said for the year.. its not 111 percent.. that's inflated interest. Also..if you pay in full..the company that your with, when you use the card paying in full each month.. the only profit the company is making off of you is interchange fees. So..if you pay interest of 23.00 2 times a year.. that's all the grantor has really made profit off of you as a customer for that year.. and therefore..that does not make you a very profitable customer no matter what credit score or income you have. Plus you have a card with points or miles...you should have a annual fee for that to mantain the account. The Grantor also has to pay 3 or 4 percent to the government on the loan that's issued. There's a lot to it. Call your credit card company and get a lower interest rate... like fixed rate of 1 or 2 percent so you will not have finance charges at 16 percent when you carry a balance. In this case.. if I was handling the account.. you call and bring it to my attention..if you have profitability and you asked to remove the fee.. I would have removed it and also educated how to avoid those fees in the future which I did explain to you. Just trying to help you out. it can be tricky and a catch 22