Something you need to know about your credit card

Some credit card companies are adopting fairer rules for charging you less. Let's find out which ones...

Have you ever come across the term ‘order of payment’? If you've got a credit card, it’s a term you should familiarise yourself with because it could rack up your interest charges if you don’t.

It refers to the order in which your repayments are allocated to different sources of debt on your card. You probably assume the oldest transactions are automatically cleared first ahead of newer ones, but this is most definitely not how it works in practice.

Order of payment can either be positive or negative. In simple terms, positive order of payment means your monthly repayments are used to clear the most expensive debts first - so those with the highest APRs are paid off earlier - while cheaper debts with lower interest rates are repaid last.

Negative order of payments means exactly the reverse, so the least costly debts are paid off before more expensive ones. This leaves the debt with the highest APR on the card longer, racking up extra interest charges that you have to pay.

So for example, debts with high APRs, such as cash advances - which can be charged at almost 30% APR - will only be cleared once a 0% balance transfer has been completely paid off first. So, that means if you use your credit card for different purposes, you'll most likely get caught out by negative order of payment.

New rules

It probably won’t surprise you to hear the vast majority of credit card lenders operate negative order of payment, simply because it’s more profitable. But it isn’t fair to consumers. This has necessitated a change in the rules which is due to come into force in January 2011.

Since October 2008, all credit card companies have been required to state the order in which repayments will be allocated in the terms and conditions for each credit card. But from January next year, negative order of payments will be completely outlawed. In its place payments will have to be used to clear the most expensive debt first, reducing the amount of interest you’ll pay overall.

The new rules are great news for all credit card holders. Even better, some credit card companies have already adopted positive order of payment, several months before the January deadline. In fact, Nationwide has offered positive allocation of payments alongside promotional introductory rates since its credit cards were launched in 1997. 

How much more does negative order of payment cost?

Using the Nationwide Gold card as an example, debts are repaid in the following positive order: fees, charges and interest shown on your statement, and then to the debt bearing the highest interest rate - cash advances, purchases and balance transfers charged at the standard APR, purchases charged at promotional rates and finally balance transfers charged at promotional rates.

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Nationwide reckons cardholders could save as much as £225 in interest over the first year by operating positive order of payment instead of negative. This figure is based on the following calculations:

You transfer a balance of £2,240 onto the Nationwide Gold Card and make £295 worth of new purchases each month. You also withdraw £60 in cash using your card in months one and seven, and you make monthly repayments of £330 over a 12-month period.

(Note that these figures are based on average card usage by Nationwide Gold card holders between January 2009 and February 2010.)

You can get around negative order of payment by choosing a card which offers exactly the same promotional period on both balance transfers and purchases. The Virgin Money 12/12 Credit Card is a good example which offers a year-long interest-free period on both sources of borrowing. But I think it's far more transparent to do away with negative order of payment altogether.

Luckily, the selection below shows half a dozen credit card companies which have already switched to positive order of payment. Note that all credit cards from Co-operative bank and MBNA work in this way, so I have chosen one popular example from each range:

Cards which offer positive order of payment

* This card is only available to Current Account Plus or Privilege Current Account holders.

With all other cards, your repayments would be allocated to paying off the debt with the longest promotional period first which is usually, but not always, the balance transfer. This means, once the promotional period runs out on your purchases, the far higher standard APR kicks in. You won’t even begin to pay them off until the balance transfer is totally cleared first.

But you can rest assured you won’t get hit with extra interest charges like this if you use any of the cards in the table above for a balance transfer and spending.

Which card should you choose?

Of course, you shouldn’t base your decision solely on whether a card operates positive order of payment. That said, if it happens to offer a competitive 0% promotional period as well then you know you won’t go far wrong.

For example, the Nationwide Gold Card offers 15 months interest-free credit on balance transfers, which is one of the best deals on the market. Similarly, the AA Reward Credit Card offers a generous deal on purchases at 12 months. Neither is quite the market-leader, but both are very competitive. And if you find you have to put different sources of debt onto the cards, you won’t be caught out by the allocation of payments.

In a little under four months, all credit cards will be forced to work in this way, but why not take advantage of those which have moved to treat you more fairly now?

Compare credit cards at lovemoney.com

More: Win rewards for spending interest-free | Transfer your credit balance for free