Help - how do credit card companies calculate their interest charges?

Customers who pay their credit card bills in full by the statement demand date pay no interest at all, with a few exceptions. Those who do charge even when you clear the account include: Alliance & Leicester Diamond, Bank of Scotland 'One', Halifax Visa Balance, Lloyds TSB Asset Advance, Co-op Gold Advantage.

Otherwise, for the months that you do not pay your bill in full by the due date, you are charged interest on the whole balance and not just the amount left unpaid. In these circumstances, most cards start charging interest from the date you make the purchase. Until now, John Lewis has been generous and charged no interest until the first of the month after the payment due date. But from October, with sister store Waitrose, it will backdate interest to the date of purchase.

When you paid no interest until the due date, it made no difference whether you paid early or late in the month. But with interest clocking up from the day you shop, you can save interest by paying the bill when it arrives. Interest builds up daily, so the sooner you pay, the less interest you incur. If you pay the bill in full, you avoid interest anyway, so might as well pay at the last moment.

At the end of the month, card companies calculate your average daily balance. Assuming, in a 31-day month, you spent £2,000 on the 10th and £50 on the 20th: you have borrowed £2,000 for 22 days and £50 for 12 days. The daily average balance is £1,438.71. Multiply this by the monthly interest rate for the interest until the date of the statement. But this is only the start of the calculation. You then pay interest from the statement date until the time you pay the bill, again based on the daily average, but taking account of credits and money paid in. It means you are paying interest on the interest.

You can reduce interest charges by making large purchases late in the month. Your balance at the end of the month will be high but the daily average will be lower.