Credit Card Providers Profit From 0% Balance Transfers

June 7, 2006

By Peter Kenny

The Nationwide Building Society is launching a new television advertising campaign from June 12th highlighting that many credit card providers are using credit card repayments to pay off the cheapest debt first.

It is estimated that banks and credit card companies are making on average £500 million in extra profit each year by simply allocating a credit card holders payment to the cheapest debt first. Many credit cards that are offered with a 0% introductory balance transfer deal usually come with a hidden cost. This hidden cost can be the way that payments are allocated to pay off a consumer’s debt.

The order of payments has a significant effect on the interest payable. Many people assume when they use a credit card with a 0% balance transfer offer, that their monthly repayment will cover any purchases they make. Unfortunately, in many instances this is not the case. More recently many credit card providers have been changing the way payments are allocated to debt. Any payments made to a credit card account are normally used to pay off the debt that attracts the lowest interest, in this case the 0% balance transfer, only then will payments be allocated to purchases and cash withdrawals. Cash withdrawals attract the highest level of interest and many cases if a cash withdrawal is made, interest is charged immediately no matter if the balance is paid in full with the next credit card statement.

The Nationwide Building Society is the only major credit card provider that applies payments to the most expensive debt first. Nationwide estimate that their payment allocation policy saves credit card holders over £100 each year in interest.

Stuart Bernau, an executive director from Nationwide, said: "Many credit card providers use low introductory rates to lure people into opening an account. These offers can look very appealing, but when you scratch beneath the surface you discover that credit card holders often don't receive the full benefit of these low rates. Most providers apply repayments to the cheapest debt first making it more expensive for you and more profitable for them. We call on the industry to play fair by consumers and apply repayments to the most expensive debt first."

It is always recommended when using a 0% balance transfer to not use it for purchases. To limit the exposure to interest charges a second credit card must be used for purchases, preferably with a 0% purchase offer.