Credit Card News Credit Card Users Beware Cheapest Debts Are Paid Off First 18470055
Credit card users beware: Cheapest debts are paid off first
27 October 2009 / by Rachael Stiles
The majority of credit card users are unaware that most credit card providers use their payments to repay the cheapest debts on the card first, a process which accrues more interest.
Research from moneysupermarket.com has found that almost two-thirds of credit card holders do not understand that if they have used their card to withdraw cash, which is charged at a higher rate than balance transfers, they will not pay this off until the cheaper debt is cleared.
This lack of awareness could end up costing credit card customers hundreds of pounds, the price comparison website warns, urging consumers to read the small print so that they know what they are getting into.
While 66 per cent of credit card users expect the most expensive debt on their account to be repaid first, only two credit card providers operate their repayment structures on this basis, moneysupermarket’s analysis of the credit card market reveals.
When confronted with the reality of these ‘negative hierarchy repayments’, credit card holders said that they felt cheated, angry, confused, and worried.
moneysupermarket has calculated that if consumers incorrectly use a card with negative payment hierarchy they would pay almost twice as much in interest on a £3,500 debt compared to a card with a positive payment hierarchy, where the more expensive debts are cleared first.
Commenting on the fact the current repayments hierarchy system is widely misunderstood by consumers, Clare Francis, site editor at moneysupermarket.com, said: “This goes to show the importance of reading and understanding the terms and conditions before using a credit card so that consumers aren’t caught out.”
A few providers operate a positive repayment hierarchy, which shows that they are acting in the customers’ best interests, Ms Francis said, and while other credit card companies argue that this system will put an end to low rate or zero per cent deals, these offers only benefit a small number of customers, she countered.
“A credit card is a flexible product and the negative payment hierarchy stifles this flexibility, as consumers who carry a transferred balance on their card have to look to another card to make purchases,” she said. “Changing the repayment hierarchy should lead to fairness for all customers who will be able to use this flexible product in the way it was intended.”
Ms Francis recommends that customers not use a balance transfer credit card for purchases which are often charged at a higher rate, before checking with the provider what payment system they use.
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