The possible class action against banks for charges for late payments has attracted a lot of attention. The publicity stirred a reader to write to us about their experience.
Their problem concerned charges on a late credit card payment. An automatic payment authority had been in place giving their credit card company the right to deduct the amount due. Things had gone along for years without a hitch, until last month.
The month before, the reader had used their credit card to pay a rates bill so the amount to be deducted was unusually large and more than they had in their cheque account. The AP was rejected and the payment not made on the due date.
Realising the next day what had happened, the payment was made in full and the debt cleared - an honest enough mistake and no doubt one that many people make from time to time. The credit card holder had expected the credit card company to charge interest for one day at the prescribed rate, which was 19.95 per cent.
But they were charged $96.22 interest plus a $15 late payment fee. Given the account was unpaid for only one day the $96 interest represented an annual interest rate of 589 per cent.
Outraged, our reader asked the bank to explain how they arrived at the interest charge. The bank explained the interest is not based on the time between the due payment date and the actual payment date but is back-dated to the previous month's closing balance. In other words, the normal 30 days interest-free period is ignored.
Our reader was therefore charged 31 days interest for a payment that was only a day late.
This story does have a happy ending though. The bank did agree to refund the $96.22 interest charge in full, as well as the $15. The complaint was made at the same time the press were covering the class action story so maybe that helped the reader, but whatever the reason, well done to the bank.
However, we don't think the way the bank calculates the penalty interest is fair so be wise and don't be shy about challenging your bank. It is also a warning about credit card payments and the need to pay the monthly account on or before the due date.
It's not the only case of a bank reversing charges. A number of years ago, we became aware that a bank was charging the full rate of interest on a loan even though the borrower had not drawn down the full amount. The borrower became suspicious and asked the bank to explain their calculation only when they compared the interest charged against the principal borrowed.
Eventually, they received a full explanation. The borrower challenged the bank on the grounds that the bank should not be charging interest on money they had not loaned. The bank would not budge and things became deadlocked, until the borrower said they were going to refer the matter to the Banking Ombudsman for a ruling.
At that point the matter was passed on to someone else in the bank and resistance and obstruction melted into compliance and co-operation. The bank fully refunded the overcharged interest, amounting to many thousands of dollars, and apologised profusely.
In our view, it was not really a case of the bank seeing the error of its ways - more of a case it did not want the publicity that would flow from the Ombudsman's ruling and a potential order that the bank fully refund every other case where this overcharging had occurred.
We wonder how many people are not wise enough - or stroppy enough - to challenge their bank. We think people like our readers mentioned are the exception, rather than the norm. It's time to get smarter with your money, Kiwis!
Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips at www.oilyrag.co.nz.