Card providers still leave customers in the dark

Credit card customers still do not know the order in which their payments are allocated to their account, according to research from Nationwide Building Society.

Over two-thirds (69%) of those questioned do not know the correct order in which their repayments are processed. Incorrect answers given were:

The longest outstanding debt is paid off first (18%)
Items with the highest interest are paid off first (12%)
They get to choose which items are paid off first (9%)
The most recent items are paid off first (4%)
And many simply don’t know (26%)
(Whilst 2% wouldn’t know as they only ever pay off the entire balance)

Worryingly, only around a quarter (29%) of those questioned know how their repayments are allocated to their credit card account – that items with the lowest interest are paid off first – known as an adverse order of payments. Nationwide is the only card provider to operate a positive order of payments which means the most expensive debt is paid off first unlike its competitors who choose to leave items with high interest, such as cash advances, to continue to accrue interest and be cleared last.

Two-thirds (66%) of credit card holders think it is important to find a credit card provider that allocates their repayments to the most expensive debt first. However, as the recent uSwitch survey of credit cards revealed, on average people stay with their credit card provider for six years – even if the proposition is poor – highlighting that providers are taking advantage of their customers’ apathy. Unfortunately, apathy about order of payments alone costs consumers £500 million each year.

Nationwide recently welcomed the announcement by the Department of Trade and Industry that, from 1 October 2008, all credit card providers will have to draw attention to the order of payments they use. However, because this practice is not well understood by consumers, and is adverse to their best interests, Nationwide calls on the industry to make changes now and treat their credit card customers fairly by adopting a positive approach to their order of payments.

Jeremy Wood, divisional director at Nationwide, says: “Nationwide has long-campaigned for a positive order of payments for all credit card customers. Many credit card providers use low introductory rates to lure people into opening an account. These offers can look very appealing, but when you scratch beneath the surface you discover that credit card holders often don’t receive the full benefit of these low rates. Most providers apply repayments to the cheapest debt first making it more expensive for you and more profitable for them.

“Something needs to change as it’s unacceptable that over two-thirds (69%) of credit card holders do not know how their payments are allocated. We urge the OFT, when they respond to Which’s super complaint about the calculation of credit card interest, due at the end of this month, to address the issue of order of payments.”