Negative Hierarchy Credit Card Interest Payments
The Disadvantages of a 0% Interest Balance Transfer Cards
Apr 4, 2009
Negative hierarchy interest repayments will be an unfamiliar term for most consumers with a 0% credit card. However, in the sometimes confusing world of credit card interest rates, it’s a term that people, if they want to save money, should very quickly become aware.
Traditionally the first quarter of the year is the time where borrowers are faced with large repayments generated by their Christmas spending. However many make the repayments without a proper understanding of how interest is applied to their spending.
0% Balance Transfer Credit Card - Cheaper Debt
A 0% interest balance transfer credit card, if used correctly, is a great way of making debt cheaper simply by transferring interest-bearing debt from another card to a new 0% rate. However, it’s essential that unless the full monthly balance is paid no other spending should be made on the card. For those considering spending on a 0% rate card, consider the following scenario.
A borrower applies for and receives a 0% interest on balance transfers credit card and moves £1,000 of debt from another card to it, then proceeds to make purchases on the card followed by a cash withdrawal.
- The consumer has now completed a balance transfer at 0% interest.
- Has made a purchase and is being charged the card’s standard rate, let’s say 16.9%.
- Has withdrawn cash and is being charged at a much higher rate, let’s say 27.5%.
Negative Hierarchy Interest Payments
If a credit card company uses the negative payment hierarchy, any repayments made are automatically allocated to the debt with the lowest interest rate. In the example above that is the 0% balance transfer. That means, particularly if only minimum repayments are being made, that the other two debts will very quickly rack up large amounts of interest.
The Nationwide Building Society, one of the few companies to offer a positive order of repayments, has said the government should follow the example of the USA which is soon to make negative hierarchy illegal.
Positive Repayments Mean Savings
The Nationwide publicity material suggests that positive repayments add up to an average saving, to borrowers, of £213. If this figure is even close to being realistic it highlights the truly staggering amounts of interest a negative hierarchy attracts.
Credit Card Lending
Peter Harrison, a credit card advisor at moneysupermarket.com has said: “ If the government actually wanted to make a substantial difference to credit card lending practices, it would insist that payments made by people were assigned to the highest interest debt first…”
With the UK government currently considering new credit card legislation it’s an ideal time for consumers to lobby their Member of Parliament to push for US style protection.
Sources:
Consumer Credit Counselling Service, Debt Problems Spread to the More Affluent -March 2009
Nationwide Building Society, Order of Payments
Peter Harrison, Fed’s Ruling Ramps up Pressure on Westminster - moneysupermarket.com 19/03/2009
 |
