Don't get caught out by negative order of payment - Video Script

Rachel Robson explains how negative order of payment works and how to avoid it.

In today’s video, I’m going to talk about one of my pet hates when it comes to credit cards – negative order of payment.

What is it?

Negative order of payment, or negative payment hierarchy as it is also known, is a dirty trick adopted by the majority of credit card companies.

In a nutshell, it means that your cheapest debts are paid off first, and the most expensive debts are paid off last. So you end up paying a lot more in interest.

Give me an example

Let’s say you have a credit card which offers an interest-free period on balance transfers for fifteen months. It also offers three months interest-free on new purchases. After that, it charges an interest rate of sixteen point nine percent.

Let’s say you transfer a balance of two thousand pounds onto the credit card and then start using it to make a couple of purchases, spending a total of one hundred pounds.

You make sure you repay that one hundred pounds before the three month interest-free deal is up, believing that this way, you’ll avoid paying any interest at all on your debts.

But you’re wrong.

The cunning trick

During the fifteen month nought per cent period on balance transfers, every payment you make towards your credit card debt will go towards paying off the two thousand pound balance you transferred over.

This means you won’t have paid anything towards the new debt you’ve run up by spending on the card.

So once the three month interest-free period on purchases is up, your one hundred pound debt will be hit with an interest rate of sixteen point nine percent. And that debt will lie on your card, racking up interest – because you won’t be able to make any payments towards that debt until you’ve cleared the entire balance you originally transferred!

How to avoid

The easiest way to avoid negative order of payment is to make sure you use one credit card for balance transfers and a different one for new purchases. That way you won’t get caught out by this nasty trick.

Alternatively, find a credit card that offers exactly the same period for both balance transfers and purchases, or look for a card provider that operates positive payment hierarchy, such as Nationwide and Saga.