Anger over the way credit card debts are repaid

New research from Nationwide Building Society has revealed that over half (56%) of credit card customers would be left angry (38%), shocked (8%) or surprised (10%) if they found out that their credit card provider pays off their cheapest debt first. Nearly two-thirds (65%) of credit card customers think it is unfair for providers to make an additional profit from operating an adverse order of payments.

This practice of allocating payments to the cheapest debt first is common among lenders, and is known as a ‘negative payment hierarchy’ and means items with high interest, such as cash advances, continue to accrue interest while balances with the lowest interest rates – such as balance transfers – are paid off first.

Nationwide is currently the only high street provider to operate a positive order of payments, which means the customer’s most expensive debt is paid off first.

According to the research, nearly two-thirds (63%) of credit card customers still do not understand the order in which their repayments are allocated, compared to 69% in 2007. Nationwide now argues that the steps taken to make the order of payments more transparent, such as the addition of an explanatory box to statements, have made almost no difference to customers’ understanding.

Clare Francis of Moneysupermarket, said:

“There are a few providers, including Nationwide Building Society and Saga, which clear the most expensive debt first, but the vast majority work the other way around – something that is widely misunderstood by consumers. This lack of understanding means many of those who have an outstanding balance on their credit card end up paying a huge amount of interest and the debt sentence can last for years – decades in some cases.”

“Changing the repayment hierarchy should lead to fairness for all customers who will be able to use credit cards in the way they were intended.”

Nationwide’s product and marketing director, Chris Rhodes, said:

“Our research results are unequivocal: consumers still don’t understand this issue and continue to be penalised. Further transparency will simply not work. This is a fairness issue and a positive order of payments is now the fairest way forward for consumers.”

“The results send a clear message to the Government: consumers want them to intervene to stop this unfair practice. We hope the BIS review makes negative order of payments a thing of the past.”