Bit of a brain twister this one. It stems from a debate about phrasing we were having inside MSE Towers – I’d appreciate your views as to whether this is a semantic or real issue…
In our credit card guides we’ve always warned against the danger of compound interest on credit cards and sometimes used the phrase "they charge interest on the interest". Recently, however MSE Alana and MSE Dan approached me suggesting that with the changes to the minimum repayment rules this phrase is no longer appropriate.
The reason is the new rules mean the minimum repayment must always at the very least, cover the interest cost so the interest itself doesn’t ramp up because it’s cleared.
Following me so far? OK, so MSE Dan and MSE Alana therefore argue that you can’t charge interest on the interest, because the interest is cleared. There certainly is logic in that.
I however, am struggling to see why the amount you repay impacts it at all – the interest is by definition compound interest and that is "interest on the interest". The fact that you need to repay enough to clear the interest each month doesn’t change the state of the interest charged.
In the end we decided the easiest thing was just to warn about "compound interest" – yet it’s quite a conceptual wrestle and we’d love your thoughts.