Warning over credit card payments
Updated on 09 October 2007
More than three-quarters of credit cards make people pay off their cheapest debts first before they can start to repay their more expensive ones, a financial website has warned.
Credit cards charge different interest rates for different types of borrowing, such as purchases, cash advances and balance transfers.
But MoneyExpert.com said many providers were taking advantage of so-called order of payment rules, which allows them to use repayments to clear cheap debt first, leaving customers paying higher interest rates on more expensive debt for longer.
It said 76% of credit cards cleared debts on cash advances last, with this type of borrowing generally having the highest interest rates at an average of 23.96%.
It added that more than 80% of cards had purchases and cash withdrawals as the last two items to be cleared.
The group urged people to find out from their card provider which debts would be paid off first.
It said most cards repaid fees for late payments first, followed by balance transfers, purchases and finally cash advances, although the payment order could vary.
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%. 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."
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