Credit card users don't understand repayments hierarchy

The majority of credit card holders are unaware of a charging mechanism which could be costing them hundreds of pounds, according to research from moneysupermarket.com.

Consumers might think it is logical that a monthly payment towards an outstanding debt would go towards paying off the balance with the highest interest rate first. However, most cards do not operate on this basis. In fact, all but two credit card providers in the UK work on a low-to-high repayment hierarchy (negative payment hierarchy) basis - where the cheapest debt is cleared first. However, research from moneysupermarket.com shows that just 34 per cent of credit card users expect providers to pay off their cheapest debt first.

Furthermore, when confronted with the negative hierarchy of repayments, credit card holders feel cheated (37 per cent), angry (29 per cent), confused (17 per cent) or worried (7 per cent). Only nine per cent say they are not bothered by this system.

Clare Francis, site editor at moneysupermarket.com, said said: "Our research shows that the current repayments hierarchy system is widely misunderstood by consumers and many end up paying more than they should in interest as a result. 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.

"Only two providers, Nationwide and SAGA, use positive repayment hierarchy, which demonstrates good practice that is in the interests of the consumer. Credit card providers will argue that changing this system will lead to the loss of low rate or zero per cent deals; however these offers only benefit a relatively small number of customers.

"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. 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."

Analysis by moneysupermarket.com has discovered 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.

Clare Francis continued: "Whilst the issue can come across as a bit confusing, consumers shouldn't be blinded to the sums of money involved. It is clear that if used incorrectly a negative payments hierarchy hits credit card borrowers hard in the pocket.

Those looking for a credit card should try to make sure they don't use a balance transfer card for purchases, and, if they intend to, it is worth double checking with the provider what payment system they employ."