Credit card users don’t understand that their cheapest debt is paid off first

Credit card holders don’t realise that their cheapest debt is paid off first, according to research by moneysupermarket.com.

The majority of credit card users have not read the small print of their contracts and are therefore unaware about the charging mechanisms used by credit card companies.

This could be costing card users hundreds of pounds, moneysupermarket.com has found.

Consumers might think that their monthly payment towards an outstanding debt would go towards paying off the balance with the highest interest rate first. However, most cards do not operate on this basis. In fact, all but two credit card providers in the UK work on a low-to-high repayment hierarchy (negative payment hierarchy) basis – where the cheapest debt is cleared first.

When confronted with this negative hierarchy of payments, 37% of credit card holders felt cheated and a further 29% felt angry.

Clare Francis, site editor at moneysupermarket.com, points out that: “Our research shows that the current repayments hierarchy system is widely misunderstood by consumers and many end up paying more than they should in interest as a result.”

“This goes to show the importance of reading and understanding the terms and conditions before using a credit card so that consumers aren’t caught out.”

“Only two providers, Nationwide and SAGA, use positive repayment hierarchy, which demonstrates good practice that is in the interests of the consumer.  Credit card providers will argue that changing this system will lead to the loss of low rate or zero per cent deals; however these offers only benefit a relatively small number of customers.”

Moneysupermarket.com has discovered that if consumers incorrectly use a card with negative payment hierarchy they would pay almost twice as much in interest on a £3,500 debt compared to a card with a positive payment hierarchy.

Credit card users should ensure that they fully understand the terms and conditions of their credit cards before using them as a means to borrow.