Ask Our Expert

Negative payment hierarchy

Dear Chris,

I read somewhere that credit card providers are doing something called negative payment hierarchy that makes customers pay more interest.

Can you explain how this works?

I have a couple of credit cards and don’t want to pay more interest – how can I avoid getting caught out by negative payment hierarchy?

Cheers,

Michelle, via email on 21 December 2009

Our money expert says...

Negative payment hierarchy is a practice whereby credit card providers use your repayments to pay off your cheapest debt first.

For example, if you have transferred debt to a 0% balance transfer card and then spend on the card, the card provider will use your repayments to pay off all your transferred balance first (which isn’t incurring interest) before paying off your spending (which will be incurring interest).

So, you’ll be paying interest on your purchases until your entire balance is cleared.

Unfortunately, the vast majority of credit card providers practise negative payment hierarchy.

The only high street credit card provider that doesn’t is Nationwide (www.nationwide.co.uk). Instead it practises positive payment hierarchy (using your repayments to clear expensive debts first) on all its credit cards.

Nationwide has estimated that its positive payment hierarchy could save the average customer £224 over one year compare to other cards.

So, getting a Nationwide credit card is one way to avoid negative payment hierarchy.

The other solution is to use separate cards for purchases and balance transfers – so you can decide which debt you pay off first.

Compare 0% balance transfer credit cards

Compare 0% purchases credit cards