The terms and conditions of your credit card are made up of a number of clauses, one of which is the allocation of payments clause. This tells you the order in which your monthly repayments are allocated to your total balance.
Your credit card's total balance can be broken down into a number of sub-balances. These include:
- interest and/or fees;
- low or 0% interest balances;
- balance transfers at the card's standard rate;
- purchases made at the card's standard rate; and
- other transactions including cash withdrawals and foreign currency purchases.
(Your balance may also include insurance premiums if you have payment protection insurance (PPI), an insurance policy that provides you with income to repay your debt in the event that you become unemployed, or find yourself unable to work as a result of long-term sickness or injury. )
A credit card company can decide which of these sub-balances you pay off first. From a business perspective it is logical for the company to begin by paying off the sub-balance on which it is making no interest. This enables it to continue accruing interest on your other sub-balances.
A simple example
You owe your credit card company £2,362.64. This sum can be broken down into interest charges, purchases made at the card's standard rate and a balance transfer on a 0% interest rate. If you make a payment of £40 towards your total balance, the credit card company is likely to allocate this payment to the balance transfer, leaving any interest charges and purchases unpaid. These will continue to accrue interest until your balance transfer has been completely cleared, thus increasing the card company's profits and the total amount you have to pay.
You should ensure that you are aware of the allocation of payments clause on your card in order to minimise the fees that you pay. The clause will make little difference to someone who pays off his balance in full every month, as there will be nothing left on the card to accrue interest. A cardholder with an ongoing balance, however, should make himself aware of where his payments are going.
Is there anything I can do to avoid this problem?
The obvious solution to the allocation of payments problem is to avoid keeping a large balance on your credit card but, since this is not always possible, here are some other options that you might want to consider:
- Apply for two separate credit cards, one offering 0% interest on balance transfers and one offering 0% interest on purchases; you will be able to ensure that your monthly payments on each card are allocated directly to the balance you have transferred.
- Try to find a card that offers equal 0% interest periods on balance transfers and purchases. Again, this will enable you to keep track of where your monthly payments are going.
Please note that the above suggestions will only be of use if you do not increase the amount you already owe by making additional purchases with your new cards.
Zoe Badowska is an editor for Credit Card Comparison Online where you can compare best buy 0% balance transfer credit cards and read the guide on credit cards .