Reclaim Interest On Bank And Card Charges

Banks and card providers have been charging us unlawful penalties. Strong words, but true! You should complain about them and recover your money, as I explained here and here.

You can also reclaim any interest you've been charged on these penalties, which will add up if you've been particularly careless with your money. Unfortunately, the way to calculate this depends on your particular circumstances, and none of the maths is simple.

Therefore I'm going to focus on breaking down the most common scenarios. You'll need to know what the debt interest rate was and how your bank or card company calculates the interest (e.g. monthly). If you can't find these details, ask the company. In my examples I've used a current account, but I could just as easily have used a credit card.

Scenario one: the interest is calculated annually

You haven't a penny in your current account, you may even be overdrawn, when an unlawful charge of £25 appears, taking you into the red (or further into it). Your bank charges you interest annually at 15%. You get paid 20 days later which takes you back into the black.

To work out how much interest you paid, multiply £25 by 15% to get the amount you'd pay for a year. Then divide the answer by 365 (or 366 if it was a leap year) to get a day's interest. You multiply this by 20 to get 20 day's interest.

£25 x 15% (or 25/100 x 15) = £3.75

Then:

£3.75/365 x 20 = 21p

Scenario two: the interest is calculated monthly

If you're charged monthly, let's say at 0.5%, you do the same sum as above, but you divide by the number of days in the month instead. For this example, we'll say there are 30 days in the month. I've highlighted the amounts you enter that have changed from the first example:

£25 x 0.5% (or 25/100 x 0.5) = 12.5p

Then:

12.5p/30 x 20 = 8.3p

It's not simple, but this should get many of you started. Next week I'll take a look at calculating interest on a daily basis and at some more scenarios. I'll also show you a completely different way to calculate interest, which doesn't involve knowing how the bank or card company calculate it, or even what the rate was.*

The Consumer Action Group survey -- I mentioned it in my previous articles -- now shows that 552 people have recovered £469,885! So send that first letter!

If you need more assistance, why not ask a Fool's advice on our Dealing with Debt discussion board? Also, compare credit cards and current accounts. They'll still charge you penalties; nothing we can do about that. But at least you could get better overdraft terms and healthier interest rates.

*Update. You can read more on the claiming process in The Ultimate Guide To Reclaiming Bank And Card Charges. However, I haven't yet had time to write the other way to calculate interest. I shall do so as soon as I can.