Three quarters of credit cards pay off cheapest debt first

  • Average rate for cash withdrawals is 23.96 per cent, says MoneyExpert.com

More than three quarters of credit cards are cashing in on "order of payments" rules which allow them to clear cheap debt first and sting customers for higher interest rates, new research* from MoneyExpert.com shows. Customers using plastic to borrow cash are the worst hit.

Credit card providers charge different interest rates for different forms of borrowing – cash advances, balance transfers and purchases – and their rules mean payments from customers go towards the cheapest first.

The independent financial comparison website says that 76 per cent of credit cards clear debts on cash withdrawals last, meaning that customers will be left with the most expensive debts on their bills the longest. Average interest rates on cash withdrawals are 23.96 per cent.

And over 80 per cent of cards have purchases and cash withdrawals, the two most expensive forms of spending on a credit card, as the last two items to be cleared.

MoneyExpert.com urges customers to find out how their credit card company’s order of payments and play their cards right. Most cards agree to pay off any fees on late payments incurred first, but the order in which purchases, balance transfers and cash withdrawals are paid off varies.
Most cards’ order of payments is to pay fees, balance transfers, purchases and finally cash advances, according to MoneyExpert.com.

The website says this means typically customers will have high balances on their cards on cheap credit but will pay this first with the result that more expensive borrowing sits on their account building interest until their balance transfers are repaid.

Sean Gardner, Chief Executive of MoneyExpert.com, said: "If you’re unaware of the order of payments on your card, it’s definitely worth checking. Particularly if you’re keen to buy something but have already used your card for a hefty balance transfer.

"Under those circumstances your purchase could sit on your account for over a year while you pay off your balance transfer, incurring interest of at least 20 per cent. A £500 purchase can end up costing you £600 – or more.

"As with all credit card deals you need to check that the card you’re using is suited to your requirements. If you do want to use your card for cash withdrawals or purchases there are some cards that’ll help you pay those off first to help you avoid prolonging the interest incurred. But those are few and far between."

Compare credit cards

Notes
* Research from MoneyExpert.com, 29.08.07

Leave a Reply

Your email address will not be published. Required fields are marked *