Consumers warned to avoid picking the wrong credit card

A study by Fool.co.uk reveals that 296 out of 300 credit cards use negative payment hierarchy. This means that if you regularly carry a balance on your credit card, and the outstanding amount comprises debts that attract different interest rates, then you have a 99% chance of being with the wrong credit-card provider.

People who need to be most aware of negative payment hierarchy are those who use 0% credit cards for balance transfers, and subsequently use the card for making purchases or cash withdrawals.

With negative payment hierarchy, any payments you make will go towards paying off the debt with the lowest interest rate first. Consequently, purchases and cash withdrawals will remain on the credit-card bill racking up extra interest.Nationwide has estimated that consumers could unwittingly pay another £500m in interest payments before providers have to highlight the order that payments are made next year.

Suppose you transfer a £2,000 balance to a new credit card with 0% interest for 15 months, but which charges 16.9% APR for purchases. If you then decide to make a £500 purchase, interest will accrue on that transaction until after the £2,000 balance is cleared in full. Over the 15-month deal, the £500 debt will compound at 1.3% a month to £607.

Some of the most dangerous cards are those that have high interest rates and long balance transfer periods. So, if you inadvertently use the card to make a purchase as well as for balance transfers, interest will compound on your purchase until your balance-transfer debt is cleared.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “It is not illegal to fiddle with the order in which payments are allocated on credit cards. But negative payment hierarchy is a devious way to exploit customers’ inexperience.

“Negative payment hierarchy is especially nasty when tucked behind generous 0% balance-transfer deals. These 0% cards can be a useful vehicle for people who need some breathing space to get their finances in order.

“Our study shows that whilst the vast majority of card providers employ this sly practice, Nationwide and Saga should be applauded for their use of ‘positive’ payment hierarchy.

“But the use of negative payment hierarchy by the rest is tantamount to making customers run backwards to catch a bus. It’s an almost impossible task to accomplish especially if the bus is pulling away at speed.”

Fool.co.uk’s top tips for using 0% cards

Use a 0% balance-transfer card for balance transfers only
Destroy the card after you have transferred your balance, so you don’t use it
Pay your bill on time, every time
Make a note of when your 0% deal expires
Stick with cards whose 0% deals on balance transfers and purchases occur over the same period
When switching deals, allow plenty of time to get a new 0% card – it can take a month to complete all the paperwork