End This Credit Card 'Quirk'

A change to the way interest is calculated could bring welcome savings

- Effie Zahos

It’s hard to believe but, at one stage, some lenders would direct any additional repayments made on your home loan to pay off your accrued interest first rather than use it to knock down your balance. It may seem like a minor detail but because the interest is calculated on your daily balance and charged monthly in arrears, this sneaky process clearly favoured the lender.

Thankfully, as Canstar’s Steve Mickenbecker says, “most interest rate quirks have largely been eliminated”.

Still, the latest reform proposed by the Australian Bankers’ Association highlights the need to understand how interest is calculated, especially on credit cards.

The ABA has made a number of proposals toward better banking (see The Buzz, page 12). For credit cards, the one that stuck out for me was the proposal that customers pay interest only on what remains on a credit card, and not on the full amount of purchase if a loan is being paid down.