- Britain's credit card borrowers feel 'angry' and 'cheated' by repayments hierarchy
- Failing to understand the small print could cost hundreds of pounds
Consumers might think it is logical that a monthly payment towards an outstanding debt would go towards paying off the balance with the highest interest rate first. However, most cards do not operate on this basis. In fact, all but two credit card providers in the UK work on a low-to-high repayment hierarchy (negative payment hierarchy) basis - where the cheapest debt is cleared first. However, research from moneysupermarket.com shows that just 34 per cent of credit card users expect providers to pay off their cheapest debt first.
Furthermore, when confronted with the negative hierarchy of repayments, credit card holders feel cheated (37 per cent), angry (29 per cent), confused (17 per cent) or worried (7 per cent). Only nine per cent say they are not bothered by this system.
Clare Francis, site editor at moneysupermarket.com, said said: "Our research shows that the current repayments hierarchy system is widely misunderstood by consumers and many end up paying more than they should in interest as a result. This goes to show the importance of reading and understanding the terms and conditions before using a credit card so that consumers aren't caught out.
"Only two providers, Nationwide and SAGA, use positive repayment hierarchy, which demonstrates good practice that is in the interests of the consumer. Credit card providers will argue that changing this system will lead to the loss of low rate or zero per cent deals; however these offers only benefit a relatively small number of customers.
"A credit card is a flexible product and the negative payment hierarchy stifles this flexibility, as consumers who carry a transferred balance on their card have to look to another card to make purchases. Changing the repayment hierarchy should lead to fairness for all customers who will be able to use this flexible product in the way it was intended."
Analysis by moneysupermarket.com has discovered that if consumers incorrectly use a card with negative payment hierarchy they would pay almost twice as much in interest on a £3,500 debt compared to a card with a positive payment hierarchy.**
Clare Francis continued: "Whilst the issue can come across as a bit confusing, consumers shouldn't be blinded to the sums of money involved. It is clear that if used incorrectly a negative payments hierarchy hits credit card borrowers hard in the pocket.
Those looking for a credit card should try to make sure they don't use a balance transfer card for purchases, and, if they intend to, it is worth double checking with the provider what payment system they employ."
- Ends -
Notes to editors:
* Opinium Research carried out an online poll of 2008 British adults on behalf of moneysupermarket.com from 29 September and 2 October 2009. Results have been weighted to nationally representative criteria.
** For example, a £2,000 balance transfer and £1,500 purchase on a card which has a negative payment hierarchy - such as card at 16.9 per cent APR and 15 months zero per cent balance transfer period - £250.41 is paid out in interest just by paying the minimum amount each month. However, this is cut by almost a half using the Nationwide Gold Account credit card, also at 16.9 per cent APR, which operates on a positive payment hierarchy basis, culminating in only £131.53 in interest paid out over a 13 month balance transfer period - a saving of £119.
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