Beginner's Guide To: Credit card order of payments

The government has announced a new consultation into credit cards, proposing a raft of measures designed to "clean up the industry" and bring an end to practices it deems unfair.

The consultation will focus on how customers' monthly payments are allocated. Most credit card providers use a repayment system, whereby the cheapest debt is cleared first. The industry jargon for this is "negative payment hierarchy".

What is a negative payment hierarchy?

It means you will be charged a different rate of interest depending on how you use your card. Unless you pay your balance off in full each month, your repayment will go towards clearing the cheapest debt first, leaving you racking up interest at the highest rate.

For example, say you take out a credit card that has a 0 per cent offer on balance transfers for 15 months, but no interest-free period on purchases. If you transferred £2,000 on to the card but also used it to make £1,500 of purchases, on which you are charged an annual rate of interest of 16.9 per cent, you'd pay nearly twice as much interest if a negative payment hierarchy was applied than if a positive repayment system was used.

Do credit cards use a positive payment hierarchy?

Nationwide and Saga are the only credit card firms to clear the most expensive debt first.

How can I avoid being caught by a negative payment system?

Avoid using a credit card to take cash out of an ATM. The interest charged on cash withdrawals is usually significantly higher than on purchases or balance transfers.

If you are looking for a card to use for spending as well as transferring a balance on to, make sure the interest rates are the same. The Halifax All in One credit card, for example, has a nine-month interest-free period on transfers and purchases. Alternatively have two credit cards one for your balance transfer and the other for spending on.