A credit card revolution

by Ed Bowsher on 02 July 2009  |  3 comments
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It looks like the government is set to ban the biggest credit card rip-off of them all.

There's been speculation all week about the government's plans to change regulation on credit cards. I'm writing this at 8:15 AM. We expect the White Paper to be launched this morning.

Now, until today, all the comment has been about credit card cheques and credit limits being raised without permission. I'd be delighted if regulation was tightened up in these areas. But I'd be even more delighted if news in today's edition of 'The Times' turns out to be true.

Apparently the government is also going to ban negative payment hierarchy. If true, this is absolutely fantastic news! Negative payment hierarchy is the biggest credit card rip-off of them all, and a massive money-spinner for the industry.

If you don't know about negative payment hierarchy, here's how it works:

Let’s say I make a 0% balance transfer of £1000 to my credit card, then make a purchase of £500, for which I am charged 18.9% APR. I then decide to pay £500 towards my card.

A card that operates negative payment hierarchy allocates this payment to the promotional balance transfer, and not my purchase, which continues to rack-up lots of interest.

In short, cards which operate negative payment hierarchy pay off the cheapest debts first, such as promotional balance transfers, and the most expensive, such as cash advances, last.

Here are lovemoney.com we've campaigned against this nasty trick for a long time; most recently, in our credit card charter. If today's Times is right, we're about to witness a real credit card revolution.