Changes to credit card repayment structure begins albeit slowly

Posted in 'Personal Finance' by Richard Catlin

03 September 2010

The way that repayments are allocated to credit card balances changes from this month. By the end of the year, all credit card providers will amend their terms so that expensive debts are cleared first, following an agreement with the government earlier this year.

Until now, the vast majority of credit card providers had operated a system of ‘negative hierarchy’ – where any repayments against an outstanding balance were allocated to the cheapest debt first.

This is especially hard hitting should you use a card with a 0% introductory rate to withdraw cash or make a purchase. Because the part of the balance that has no interest is cleared first, the most expensive part of your credit card debt will sit accruing interest until the whole balance is paid.

Nationwide estimates that the current practice of applying repayments to the cheapest part of a credit card debt costs consumers on average £224 a year in additional interest charges. This has a massive impact on the time it takes to repay a large credit card balance.

An agreement struck with the government earlier this year gives lenders until the end of December to implement the changes and most are choosing to wait until the last minute before doing so.

MBNA is one of the first to announce that it has changed its procedures to comply with the government agreement, and is behind a number of big brands, including the current best buy AA and Virgin cards - so a large number of consumers should start to benefit this month.

Most other card issuers have avoided giving exact dates for changing their own terms and conditions, simply saying that it will be done by the end of December.

The recent uplift in lender appetite has coincided with card issuers rolling out some great offers. Some have overcome the issue of how repayments are allocated – by simply offering 0% interest on both balance transfers and purchases. Halifax and The Bank of Scotland each offers 0% for 10 months on both, whilst Virgin goes even further on its Purchases Card, with 0% available on balance transfers and purchases for 12 months.

So, depending who you have your current credit card with, you should be seeing some welcome changes to your terms and conditions over the coming months.