Credit Cards and Average Daily Balance Interest Calculation

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For over 20 years I’ve had credit cards… and I’ve never paid a fee. That statement was entirely true until this past month. I always use credit cards as a tool… a way to get a couple percent back on things that I would have bought anyway. Over the years, it’s added up to thousands and thousands of dollars. This last month, I gave up some of that money, more than I expected.

Over the years, I’ve moved from a method of sending in a physical check to paying online. There are some pros such as saving the price of a stamp. The biggest pro though is setting up the credit card company to withdrawl money from my bank every month, so that I’m never late with a payment. I realize that it is potentially dangerous to give credit cards this kind of access to my bank, but I grant financial institutions some leeway on not robbing me blind. For the most part, the transactions are done by computers and they are infallible, right?

This has worked out extremely well and I highly recommend everyone automate their credit card payments this way. So how did I pay a fee? I signed up for two American Express cards around the same time, the AmEx Blue an AmEx Fidelity for their great rewards (that’s a whole different article). I thought I had set up autopay on both cards, but it seems like one didn’t fully go through. I firmly believe it was an error on my part where I probably set up the same card twice.

This lead to me to getting a bill with an interest charge on it. There was also the associated late fee (double jeopardy rules should apply). With a call, I was able to get AmEx to sympathize with me. They said they’d make it so that it never happened. My credit report wouldn’t be dinged and the late fee would be taken away. I didn’t realize until I looked at my next bill with an interest charge that interest charges weren’t included in that. To get those removed, AmEx has to own up to making an error and they didn’t.

The thing that I didn’t understand is why I had an interest charge two credit card periods when I was about 3 days late in paying. When I discovered I was late, I even overpaid a small amount as a sign to AmEx that I was more than capable of paying. It turns out that there’s a curious and unexpected thing that happens when you are late with a payment that spans over two billing cycles: both cycles are considered to be considered late. It doesn’t matter that I paid off the balance in the cycle, by being late for one day it triggers the interest calculation. I would have thought that I’d have an interest charge for a pro-rated couple of days, but that’s not the case.

The interest calculation is another curious and unexpected thing. The interest charged is based on the average daily balance of the bill. So even though I had paid in full, and even more than in full, future charges on that card for that billing cycle was raising my average daily balance and incurring interest on it. So if I had made a really big purchase like a $2000 laptop (to collect the reward points as I usually do) near the beginning of the cycle (after I had paid the balance down to zero) the interest calculation would use that daily balance and continue to penalize me. Doesn’t seem to make sense that I could be penalized after paying balance in full, right? I guess some law-makers missed that one.

It makes me wonder if I can use this loophole to trigger and interest payment, give them so much money that I have a negative balance daily balance, and get the AmEx to give me a negative interest payment leading to a check in my favor. With my luck, they’ll just consider a negative daily balance the same as zero (for that day) and I’ll get charged the late fee, the interest for the day or two before the big payment to get negative took effect, and get my credit wrecked in the process.

Anyone else have a credit card, “A ha!” moment? Let me know in the comments.