Balancing act

Q How do credit card companies calculate their interest rates? I was looking at a NatWest card which offers a 5.9% APR for the life of the balance transfer. Does that mean that the 5.9% is calculated on the balance for a year?

TT

A These balance transfer rates can be confusing but basically it works like this.

Whatever sum you transfer to this NatWest card has interest added to it at an APR of 5.9% a year, or around 0.48% interest a month, until that balance has been cleared.

For example, let's say you transfer a debt of ?500. The first month after transfer, the interest payable would be around ?2.40. Let's say you pay off ?40. The next month, the balance would be ?462.40 (?500 + ?2.40 - ?40) and the interest payable would be ?2.22.

If you paid ?40 a month for around 13 months, the balance would be cleared and you would have paid around ?17 in interest.

But - and this is a really big BUT - if you make any further purchases with the card, you will be charged interest at the card's standard rate of 17.4% APR, or 1.349% a month, on any new debt you run up.

The lower rate applies only to the transferred debt, even though both charges would be shown as a single interest payment on the credit card bill.