Understanding Credit Card Payment Hierarchy
With so many of us in possession of a credit card, how many can hold their hand up and say they fully understand the repayment terms?
It's surprising how few credit card holders are actually aware that there is in fact an order in which the different types of debts on a credit card are paid off. Although it may be explained in the terms and conditions of the card, it is in fact there amongst the small print that we all often ignore.
The different types or debts on a credit card are: a balance transfer, a purchase and a cash withdrawal. The order in which these types are debts are paid off is known as the 'payment hierarchy'.
With so many competitive deals available on today's credit cards it is fair to say that the overall outlook is (but not limited to):
- 0% on balance transfers within the first 12 months
- 15.9% APR charged on any purchases made outside a possible 0% on purchase deal for 3 months
- 23% APR charged for any cash withdrawal
By taking the above information into account, which debt would you prefer to pay off first? Naturally, the one which carries the higher interest charge. If this is the case then you are looking for a credit card which has a 'positive' payment hierarchy where the first debt you repay is the most expensive one i.e. the cash withdrawal. Next off you would repay the second most expensive debt, the purchase, and finally the 0% balance transfer. With a positive hierarchy you are therefore paying the least possible interest on your credit card debts.
However, despite the number of credit cards available so very few actually offer a positive payment hierarchy. This means that the majority of credit cards out there therefore have what is called a 'negative' payment hierarchy. This is where you pay off the 0% balance transfer first or the debt which carries no interest charge. Meanwhile any purchases or cash withdrawals are paid off in succession accumulating along the way extra interest, which in turn only increases your debt.
Therefore before applying for a credit card make sure you understand the terms and conditions and if you do choose one with 0% balance transfer make sure you can clear your debt before you go ahead with any further purchases.
Compare the best credit card deals online with www.moneyoutlet.co.uk
Published on October 15, 2007
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