US takes the lead on credit card reform
Financial regulators in the US are about to force credit card companies to apply cardholders’ payments to paying off the most expensive debt first, in a move expected to save consumers hundreds of millions of dollars in interest payments.
Here the government ducked the issue in a recent report on credit cards, and none of the top eight card providers apply this policy. Instead, most of them use your payments to pay off the lowest-interest debt first.
The sneakiest use of this trick is when you take out a 0% balance transfer offer. If you then use the card for spending, you’ll usually find that any payments you make to the card will be applied to the balance on which you’re paying no interest, and only when this is fully paid off will your payments be used to reduce the debt on which you’re paying interest.
That means it’s usually best not to use a card you’ve transferred a balance to for any current spending.
If you were to make the terrible mistake of drawing £200 cash with a card you’d transferred a £5,000 balance to, you could end up paying over 20% interest on the £200 cash advance until all the £5,000 had been paid off. If that took two years you’d run up over £80 in interest on the £200 debt.
Card companies used to bury the information about how your payments are used to pay off balances in the small print but are now obliged to include it reasonably clearly in their statements.
You’ll probably wonder why UK regulators don’t follow the US example, which is what Nationwide, one of the few card providers to use payments to reduce the most expensive debt first, is urging the government to do.
