The biggest credit card rip-off of them all

by Ed Bowsher on 22 June 2009  |  0 comments
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I really dislike this devious credit card trick.

lovemoney.com published a "charter for credit card justice" on Sunday. Over the next few days I'm going to look at some of the proposals in our charter. I'll explain why we've included the proposal and how things should change. 

I'm going to kick-off with the biggest credit card rip-off of them all - negative payment hierarchy. 

Many credit card customers end up feeling short-changed thanks to this devious trick. 

Essentially, your payments are ordered in a way that maximises the card operator's profits and your bill. Your money is allocated towards paying off your cheapest debt first (the one with the lowest rate of interest). The most expensive debts are left on the card - racking up interest - until you've paid everything else off. 

So say, for example, you've transferred £500 to your card using a 0% deal. You've also racked up £500 of new spending on the card, which is being charged 16.9% interest. And you've also made the mistake of withdrawing £100 of cash, charged at 28% interest. 

Negative payment hierarchy will ensure that your 0% balance transfer is cleared first, then your new purchase debt, and finally your cash withdrawal (which has all the while been charged that enormous rate of interest). 

The negative payment hierarchy trick particularly gets my goat because it's pulled in such an underhand manner. 

The way payments are allocated is usually explained deep in a credit card's small print, and because each provider uses different phrases and language to explain (or should I say disguise) the practice, it can be very difficult to establish what a policy actually is. 

At the very least, card providers should admit they operate negative payment hierarchy clearly and openly. In fact, they should be forced to explain it to each and every person applying for a card. 

But here at lovemoney.com, we'd go a step further: Negative payment hierarchy should be banned. Credit card providers should allocate all monthly repayments to the most expensive debt first. 

There are a couple of card providers that already operate this 'positive payment hierarchy'. Nationwide and Saga both fall into this category. 

To the rest of you card operators - when it comes to payment allocation, stop ripping us off! 

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