Tuesday, 25 May 2010

Beware the M2 Credit Card

I got caught out! Here is what I learned the hard way about credit cards and interest charges on late payments.

Mea culpa, through simply not paying attention, I was a day late paying the full balance. Of course, that means interest is charged and not just for the one or two days that payment was late but for the whole time since the purchase date up to the payment date. That hurts, especially considering the usurious interest rates (mine is 19.5%) charged by the card companies, but hey it was my fault. Note to lawmakers and regulators - why is it impossible to set up a pre-authorized chequing payment for the full card balance on the due date so that late payment charges cannot happen at all?

What really aggravates is the gratuitous punishment applied by M2 type credit cards. Read this excerpt from a typical cardholder agreement (in this case a TD Visa card):
"You will lose your interest-free status on all Purchases and fees if we do not receive payment in full of your Balance by the Payment Due Date shown on your current statement. We will then charge interest on all Purchases and fees that appear on that month’s statement as well as all new Purchases and fees. Interest will be charged on the amount owing to us from the transaction date until that amount has been paid in full."

In other words, those words I highlighted in red mean that not only do you get dinged for the purchases on which you missed the payment, but also for purchases afterwards during the next billing period and until you pay the next full statement amount by the due date. Nasty! It's akin to being stopped for a speeding ticket and then being given another ticket for stopping in the wrong place on the roadway.

It does not help, once you know you have missed the payment date, to pay extra to cover the interest on the late payment. That does not stop new interest being applied. If you have paid late, the only fix is to stop using the credit card for the next billing period, or perhaps to make one tiny purchase on the card so that you have something to pay off in full, on which you will be charged a small amount of interest for sure but that will get you through the punitive cycle at minimal cost.

Which cards apply this crafty (if it took an hour on the phone for the Visa customer service rep to herself find out how this works and to explain it to me, what hopes does a consumer have to understand what they are getting into?) and nasty method, you ask? Pretty well all of them is the answer. The Financial and Consumer Agency of Canada publishes detailed comparison tables of all the credit cards here. In the table, look for the code M2 in the column Grace Period on New Purchases. All the major banks - TD, Royal, BMO, Scotia, CIBC - apply M2 across the board, except for National which uses the much fairer M1 method. The M1 method, as another excellent FCAC publication Getting the Most from Your Credit Card explains here, only applies interest on the late payment purchases and not on subsequent new purchases. M1 cards are also available from some other smaller banks and credit unions so check the tables and shop around. Another note to lawmakers and regulators - when next you think of ways to reform credit card practices I'd like to see the M2 method banned.

Interestingly, when I called to ask about the second set of interest charges on the new purchases (the M2 stuff), the TD Visa customer service rep very quickly cancelled the second interest charges citing the fact that I normally pay off the card balance in full. So, if you are in the same situation give them a call and ask.

Update Nov.1, 2010 - Good news. Apparently M2 has gone away - according to the Financial Consumer Agency of Canada website, footnote 5, M1 applies to all cards across Canada as of Sept.1, 2010.


Michael James said...

I ran into this problem myself a while back. I was hit with interest for 3 consecutive months. At the time I thought I figured out why three months made sense given the wording of the agreement, but the subtleties escape me right now. If I ever make this mistake again, I'm just going to stop using my card for about 2 months to give everything a chance to clear.

Anonymous said...

I had this happen earlier this year - missed the payment date by a day (it seems that my new credit card company makes the payment dates on Sundays - perhaps because they can get more people to make a late payment then?)

I spent a good hour on the phone with them trying to discover how a 1-day late payment could possibly add up to a $65 charge. They couldn't explain it. They insisted "that's the way it works" but could not actually give me the formula to calculate this amount. (They gave me a formula, but using their own math the number added up to less than half of what they charged me.) In the end, it turns out that the interest charges were retroactive not just for the current billing period, but for a large portion of the previous billing period as well.

Being as I had only switched to this new card within the previous year, I didn't have much luck in getting them to reverse the charges. After telling them I would simply stop using this card and switch to another one, I ended up getting a 50% reduction in the charge, plus they reinstated the "interest free" period immediately so I didn't get stung by interest charges for the next month as well.

These types charges should be spelled out in a very clear fashion in the cardholder agreement, but they are not. There are some vague references to late charges and interest charges, but there is no way to calculate the amounts yourself.

Neil said...

My (BMO) agreement actually requires two consecutive months of full payment before the interest stops. Again, though, regular full-payers can usually get it waived if you call and complain.

I don't know that this is necessarily unfair...normally the bank is providing an interest free loan, so charging interest in certain circumstances may be sucky, but not fair...that's not how I'd describe it.

Canadian Couch Potato said...

FYI, American Express does allow you to set up an automatic payment for the full balance. Granted, this is a charge card, not a credit card, and probably shouldn't be the only one you have (not everyone takes Amex). But I've found it convenient and never pay a cent of interest.

Jordan said...

Jean, Call TD back and explain how you always pay your balance and ask for a "one time exception" on the original interest. Just explain how you pay off your balance every month and made a mistake. They will probably check your 12 month history and then reverse the interest.

For myself I seem to be consistently late for 1 credit card payment each year (I donno why it just keeps happening) and have always been able to have the CSR reverse it just by asking.

My American Express Gold card is setup for full automatic balance payment, and since I get 2% cash back on every dollar it's a fool proof way to make a few hundred dollars a year for nothing!

CanadianInvestor said...

Hey, thanks for the info re Amex, looks like an interesting possibility. Jordan, like you, being late with a payment seems to happen to me every couple of years.

Andy R said...

My credit card through a major Canadian bank is set up for a "pre-authorized chequing payment for the full card balance on the due date so that late payment charges cannot happen at all?"

The reason I set it up that way was precisely because of the M2 interest grab you outlined.

Maybe you need to ask about your card issuer about options in this regard.

Just Another Guy said...

I have been using the
AMEX credit card for years with the auto-payment coming out of my PC bank account.
I have just opened up a TD Visa credit card and found out that they don't offer the "auto-payment" process.
I love AMEX for the ease of use, but no everywhere accepts it.
I may haveto reconsider my reasons for getting the TD Visa card.

Niels said...

This is what TDVisa said when I put the question to them regarding overdue interest:

"Yes, you can pay the full amount anytime before the due date to reduce interest charges.

Here are some information on interest charge.

* When a partial payment is made, interest is calculated from the date that each transaction is posted. However, the balance is reduced on the date the partial payment is received and interest is calculated on the reduced balance until full payment is received.

* If full payment is received by the due date, interest is not charged on any purchases made during that statement period.

* Cash advances always accrue interest, calculated daily from the date the cash advance is made until full payment is received."

Financial Cents said...

Great to know about! Thanks for sharing, albeit, through an unfortunate experience. Sounds like you're not alone on this one.

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