Credit card companies are duping customers into paying an extra £500m of interest a year by manipulating the repayments that they receive from cardholders, according to new research by Nationwide.
The building society says that almost all credit-card lenders use customer repayments to clear the debt that is held at the cheapest interest rates - such as that which has been transferred from another card on a 0-per-cent offer.
However, all debt that is subject to higher interest, such as more recent purchases, is held on the card, accruing interest for the provider.
Nationwide's executive director, Stuart Bernau, says that most people are unaware of the technique used by the credit-card companies, and often get landed with an unexpected interest charge when they believed that their debt was being held on a low or 0-per-cent rate. "This is a policy that enables banks to make half a billion pounds of profit every year - or £50 per year for every credit cardholder affected," he says.
"I don't believe that consumers really understand how they are charged interest on their credit cards. At a time when banks should be seeking to rebuild trust among consumers, this is the sort of practice that undermines that trust.
"Any debt counsellor worth their salt would tell you to pay off your most expensive debt first, and yet most credit- card providers do exactly the opposite. When you make a payment, they apply it to the cheapest debt first. That makes it more expensive for you and more profitable for them. In many respects, we believe that this turns best advice for those in debt on its head, with banks putting profits first and not consumers."
Mr Bernau adds that some lenders actively encourage their customers to spend on their card after they have made a 0- per-cent balance transfer, knowing that any repayments they make will be used to reduce the 0-per-cent debt. Morgan Stanley, for example, which offers customers 0-per-cent balance transfers, also promises cash back on purchases.
In a report released earlier this month, the Treasury Select Committee criticised credit-card providers for still failing to be adequately transparent in their charging. However, many still fail to make it clear to their customers exactly what they are being charged interest on.