Pay off your credit card debts in the right order - theguardian
It means avoiding overpaying £500m a year, as Sam Dunn reports
Credit card users are routinely hit with hundreds of pounds in extra
interest because banks force them to
pay off their cheapest debts first. We now overpay an estimated £500m
every year thanks to an "adverse order of payments", says Nationwide
building society.
"Adverse order" means that by paying off your cheapest debt first, credit card companies let the more expensive ones last longer thus earning extra interest.
Typically, when you transfer a balance to a new credit card it is at 0% interest. If you then spend on the same card (charging, say, 15.9% APR for purchases) you may assume there'll be no interest if you pay this off the following month.
However, the monthly repayment is first used to pay down the original balance transfer: leaving the new purchase accruing interest.
Nearly every UK credit card provider penalises users this way. But Nationwide, along with Saga, pays off the more expensive debt first and is seeking to highlight the practice ahead of the government's consultation period for its "Better Deal for Consumers" white paper.
"'Adverse payment order' particularly affects the most vulnerable - those who are facing difficulty and have to transfer debt between credit cards, or need to use their card for emergency cash withdrawals," says a Nationwide spokesman. Its calculations suggest an average customer can save £224 in interest by transferring a £2,020 debt to its Gold credit card compared to a regular card with "adverse order of payments".
Next year, US legislation ushers in rules requiring all card issuers to switch from adverse, or "negative" OP, to "positive", where pricey debt is always paid down first. Credit card companies here are under intense pressure to retain such charges after suffering hits to their income from lower penalty charges, high defaults, and lower payment protection insurance sales.
Since October 2008, credit card statements must tell customers about the payment order and which charges are paid off first. However, says David Black of financial analyst Defaqto, "these are unclear ... and many customers won't understand precisely how it works".
The complexity of some balance transfer deals are getting worse and appear designed to catch customers out, consumer group Which? argues.
LloydsTSB Platinum card offers a 12-month balance transfer at 0%, but only if you spend £100 in the first three months on the same card. "It shouldn't be the case that any card company has offers that require people to run up more debt," says Martyn Saville of Which?
The best way to protect yourself against such charges is to take out a 0% balance transfer card and use it only for repaying the original debt.
Keep on top of interest payments by:
• Using separate cards for balance transfers and purchases: monitor exactly how much you're repaying and spending and avoid running up unnecessary debt.
• Not all banks follow the same order of payments, so double-check the rules: they are in the summary box on your monthly statement and may appear under "allocation of payments".
• If you're after a separate balance transfer card but don't have a spotless credit record and worry about further damage through fruitless applications, try comparison site
MoneySupermarket.com's "smartsearch" option. This lets you assess your credit worthiness and then attempts to match you up with the best most suitable card.