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Credit card debt & payment hierarchies

Until recently, the phrase `payment hierarchy` was one that not many consumers had even heard.

Now, however, it has made the news, as credit card providers have agreed to change the way they use a borrower`s payments to clear the debts on a credit card. At the end of the year, they`ll start using payments to clear the most expensive debt on a card first, rather than last. This is what is known as a `positive payment hierarchy` - something which some credit card providers are already doing.

After all, some forms of credit card debt are significantly more expensive than others: different cards charge different rates, but a single card can easily charge 17% for purchases and 28% for cash advances, even when it`s charging 0% on balance transfers.

Last year, Nationwide estimated that credit card holders were paying an additional £500m on a yearly basis because card providers were using their payments to clear the cheapest debts first, leaving the more expensive debts accruing interest.

Now, a recent press release from moneysupermarket.com indicates that 63% of credit card users admit they`ve `fallen into the payment hierarchy trap` by using a balance transfer card to buy things, leaving them in a position where they have to pay off the entire `balance transfer` debt before their payments start reducing their `purchase` debt.

`This is due to a repayment rules, due to be outlawed, known as `negative payment hierarchy` whereby the balance with the lowest interest rates is paid off first,` states the press release, which also says that `Making a purchase of just £50 on a card with an existing balance transfer of £2,500 could cost up to £106 in interest over 12 months, due to the higher APR rate for purchase transactions.`

"Issues like this serve as a reminder that debt can be a highly complicated subject," said a spokesperson for the IVA Advisory Centre.

"Many people end up facing debt problems because they don`t understand the implications of taking on a debt - which is one reason it`s so important to talk to an expert before those problems get any worse.

"Depending on their circumstances, however, some borrowers may find there`s no realistic way of clearing their debts without entering a debt solution such as an IVA. Again, the important thing is to get some professional advice as soon as possible."

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The IVA Advisory Centre are a licensed Insolvency Practice, offering free debt advice as well as IVAs and a comprehensive range of other debt solutions. If you are in debt and would like to explore your options, contact one of our advisers today.