Credit card users fall into the payment hierarchy trap
Research from moneysupermarket.com has found that 63 per cent of balance transfer card users have also used their card to make a purchase. Almost a third of these (29 per cent) users admitted to having never intended to make a purchase on the card in the first place.
Making a purchase of just £50 on a card with an existing balance transfer of £2,500 could cost up to £106 in interest over 12 months, due to the higher APR rate for purchase transactions. Due to the repayment methodology on the majority of credit cards, anyone making this mistake would have to pay off the entire balance transfer balance before they could repay the purchase balance. This is due to a repayment rules, due to be outlawed, known as ‘negative payment hierarchy' whereby the balance with the lowest interest rates are pay off first.
MBNA today announced it is moving to a positive payment hierarchy as of September 1st this year, four months ahead of the Government requirement. This means anyone with an MBNA card will see their repayments go towards their most expensive debts first.
Kevin Mountford, head of banking at moneysupermarket.com, said; "Despite this issue receiving a lot of publicity over the last few years, it is still worrying that many credit cardholders still make the crucial error on their cards of using them for both balance transfers and purchases. Although many cards advertise zero per cent rates for balance transfers and purchases, the majority of cards only offer short term deals for purchases. Once this deal ends, the outstanding balance is protected and will accrue interest at a much higher APR, typically over 18 per cent.
"The easiest way to avoid this mistake is two use two different cards, one for balance transfers and one for purchases, however in a market where credit is difficult to come by, this is easier said than done. Alternatively you could take out a credit card which offers equal promotional deals on balance transfers and purchases, such as the Virgin Credit Card 12/12 or go for a card such as the Nationwide Credit Card, which operates a positive payment hierarchy whereby the most expensive debt is paid off first. As of September 1st, MBNA cards, which represent a sizeable chunk of the market, will also pay off more expensive debts first.
"If you have made this crucial mistake of using your card for both, then you need to look to balance transfer away to a new card or aim to pay down your balance as quickly as possible."