How credit card companies earn more from your cash

November 27, 2006

Banks and credit card companies are profit driven just like any other commercial enterprise so it is of no surprise when they will do everything in their power to squeeze more money out of their customers. One of the least known methods they use is the order of repayment on your credit card balance.

Credit card payments can be extremely complicated sometimes, and if you don’t know the terms involved or how your balance is calculated then you could leave yourself open to unnecessary charges or end up paying too much. One such technique that can be hard to understand is the order of repayments. If you are unfamiliar with how order of repayments work, then here is some advice to clear things up and help you pay less for your credit card.

What is the order of repayments?

Order of repayments is the way in which card issuers pay off your remaining credit card balance. If all of the items on your credit card bill are being charged at the same rate, then the order of repayments is not really an issue. However, many people have a number of rates on their card charges, such as 0% offers on balance transfers, new purchase APR and cash advance interest. If this is the case, then your card issuer has to decide how these parts of the balance are paid off.

Card issuers making money

Card issuers are out to make money, and the order of repayments is one way that they can do this. Most card companies will make sure that the lowest interest parts of the balance are paid off first. This means that the most expensive items are left to accrue more interest, and so make the card issuer more money. For example, if you had £500 in balance transfers at 0%, and £800 in new purchases at 20%, the card issuer will pay off the £500 first and leave the £800 to accrue interest, as if left untouched this will make them £160 in a year. If your card issuer does this, it could end up costing you a lot of money and make it much harder to pay off your entire balance quickly.

Some banks are changing

Although most card issuers will keep the highest parts to gather interest, there are some banks that are doing the opposite. Seeing that they can gain more customers by being fairer with repayments, they make sure that the most expensive items are paid off first, meaning you pay less in interest and pay your balance off more quickly. For instance, in the above example these banks would pay off the £800 first, thereby leaving the interest-free balance transfer amount.

Getting information

If you are looking for a new card or currently have a card and are unsure of all the terms, then you should check to see how the order of repayments are calculated. Although not the main factor when choosing a card, if you are carrying a balance then you could make significant savings by getting a card that pays off the highest rates on the balance first. This is especially true if you have a large balance of which part is at 0% and part is at a high rate, as you will then quickly pay off the high rate and be left with an interest-free amount. When looking for a card, make sure you take order of repayments into account, as getting the right package will save you money.