Understanding credit card allocation of payments

When the outgoing Labour government strong-armed the credit card industry into agreeing

to end its policy of using card holder's payments for paying off their least expensive debts first, there were sighs of relief from consumers. The agreed date to end the practice was January 2011.

In the meantime, some card companies have announced that, from this September, they are altering their policy toward payment allocation.

The providers in question can be discerned with any credit card comparison.

While this may seem to be a step in the right direction - albeit a little early - the new policy has some worrying caveats.

The problem with the policy lies in how providers will allocate its customers payments when the card they are paying off has two 0% deals attached to it.

A common example will be 0% purchase credit cards for, say, six months and 0% on balance transfers (plus a small fee) for twelve months.

If someone with such a card were to immediately transfer a balance of 600 and also make a purchase of 600 then there would be a subsequent six months where both 0% offers were running simultaneously.

The policy says that any payments made by the consumer within these initial six months will not be used on the shortest 0% deal.

So with two 0% promotions that start at the same time repayments would be allocated to the balance that would, ultimately, be most expensive.

This simply means that any payments made by the card holder will pay off the transaction that will eventually revert to the rate of interest that is highest.

Where the card providers make their cash is that by charging balance transfers with more interest than purchases, they can direct a consumer's payment to the longer of the two 0% offers.

If the previously mentioned card holder were to pay three instalments of 200, they would find that it was the debt relating to the balance transfer that they were clearing when the 0% purchase offer ended. This would mean that there was a 600 debt that had been attracting interest.

The card providers seem to have little problem with such tactics, they assure card holders that the change is in the interest of their customers.

Wary consumers holding a card with two concurrent 0% offers can avoid the negative aspects of the policy by clearing the entire debt before the offers end.

Those without a card offered by one of these specific provider, or who aren't sure, should check their allocation of payments policy. This can be found in any credit card agreement even those cards which are for poor credit such as the aqua credit card.

Understanding credit card allocation of payments

By: Justin Schamotta

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