Credit cards that bend the rules

Recent changes have made credit cards cheaper but more complicated.

Under threat of tough action, the government has persuaded credit card lenders to make voluntary changes from this January. You can read a summary of the changes in the final paragraph of Good news about your credit card.

However, I realised as early as August 2010 that not all the companies were intending to make equal changes.

Previously, with most credit cards, the debts with the highest interest rates were the last to be cleared, which was costly. Read more about it in 99% of credit cards use this trick. Now, all the card providers pay off the most expensive debt first.

Yet when you have two 0% deals – which are equally expensive – running simultaneously, it is no longer clear cut. Card providers have taken different paths. These subtle differences in small print mean more potential pit traps for the unwary. Here's how each of the big card providers implemented changes to 0% deals recently:

Nationwide and Saga

These two credit card providers needed to make no changes, as they were the honourable exceptions that were already giving us a completely 'positive payment hierarchy', even with simultaneous 0% deals. (It's called positive, because it's good for the customer.)

Both these companies will pay off the shortest 0% deal first. If you use one of their cards to do a balance transfer and make purchases, any repayments will first go towards the purchases, because those 0% deals are shorter at just three months. This enables you to clear the purchase debt without being charged any interest, and then gives you more time to clear the transfer under the longer balance transfer deal.

Sensible borrowers will not use both 0% deals on a credit card unless they plan to pay off every penny of the shortest deal before the 0% rate expires.

Barclaycard

Barclaycard told me it has now joined Nationwide and Saga. When there are two 0% deals, the payments will go towards the shortest deal first. Barclaycard currently has the best card for balance transfers. Read about it in A new 17-months interest-free credit card.

Co-operative Bank, Smile and HSBC

During a double 0% deal period, these three banks will pay off the oldest debt first. If you make a purchase before a balance transfer, then your repayments will go towards the purchase. Hence, if you want to pay off your purchase before the purchase deal ends, make sure you buy before transferring the balance. This is a little more tricky than the aforementioned cards, but many card holders have always assumed this was the way their debts would be handled anyway.

However, Co-operative Bank and its subsidiary Smile won't make these changes until July. In the meantime, balance transfers will be paid off first.

Lloyds Bank, Halifax, Bank of Scotland

Lloyds and the other banks in the same group, including Halifax and Bank of Scotland, need to be watched. It told me that when there are two simultaneous 0% deals, your repayment will always go towards the purchase deal first.

At present, this works in practice exactly like Nationwide, Barclaycard, and the others I have already mentioned. However, if the group invents a card with a long 0% on purchases deal and a short 0% on balance transfers deal, this will not work in favour of sensible card users.

MBNA, Virgin Money, AA

MBNA, Virgin and all the many other brands administered by MBNA, which includes some older Abbey and Alliance & Leicester cards, have a completely different system.

They will direct your repayments to the 0% deal with the highest 'go-to' rate. Unfortunately, this usually (and currently) means the balance transfer, which has just a slightly higher rate after the 0% deals expire. Hence, rather than allowing you to pay off your shorter, 0% on purchases deal first, your repayments go towards the transfer.

This will work out more expensive for almost all borrowers using their cards for two purposes, when compared to the other cards I've mentioned. You cannot easily pay off your purchase quickly for free with this card, and if you take a year to clear your balance transfer and purchase debts you could easily pay four to five times more interest than anyone using one of the other cards mentioned in this article.

This is another trick to add to the many I've identified. I wrote about a dozen of them in 12 ways your credit cards rip you off.

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MBNA has defended itself vigorously from my conclusions, saying that it knows its customer base and this system suits its card holders. Perhaps there is a type of customer who could save money with this system, but I have tested a few scenarios for MBNA card holders and I can find none that make this payment hierarchy cheaper for them.

How to use your cards

The easiest way to use your cards properly is to use each one for just one purpose only. If you get it to do a balance transfer, don't make any new purchases as well.

Some credit cards have long and equal deals for both transfers and purchases – such as the Sainsbury’s Finance MasterCard for Nectar Card Holders which offers 0% interest for 12 months on balance transfers and purchases. This type of card is suitable for multi use, but don't over-spend. When the 0% deal runs out, most credit cards revert to absolutely extortionate interest rates. (The Sainsbury’s credit card reverts to 15.9%.)

You should never leave debts sitting on high rates. Either switch to another card with a 0% deal or get a cheap personal loan. (Find out more about loans in Get a loan at 7.2%.)

If you miss a payment on your credit card, you will probably have your 0% deals revoked. If it's a one-off mistake, many providers will let you off if you give them a call. Otherwise, you need to move your debt immediately to something cheaper.

If you can't seem to reduce your debt and keep paying charges or interest on your credit cards, I strongly recommend getting free advice from a debt charity such as the Consumer Credit Counselling Service or National Debtline.

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More: Find a great credit card | The eight biggest debt myths | 20 top 0% balance transfer cards