The credit card trick that never dies

It astounds me that none of our usually sharp-eyed readers have spotted an unexpected discrepancy on their credit card bills from September, but it’s some comfort that no readers anywhere else have either.

I’m hoping it’s because you readers have been using your credit cards in a way that avoids all the many costly traps. One of the sneakiest and most expensive is supposed to be scrapped from the beginning of next year. Due to government pressure, the credit card industry has agreed to re-order the sequence in which we pay off the various debts on our cards (cash withdrawals, balance transfers and purchases being the main ones) so that the most expensive is paid off first.

Up till now, if you had, say, a balance transfer at 0% and a purchase at 16%, whenever you made a repayment the card provider would reduce your balance transfer first, leaving the more expensive purchase on the card for longer and therefore costing you much more interest. This practice is known as negative order of payment, but in January it should be reversed.

There have always been honourable exceptions to this that take a positive order of payment, notably the Nationwide Gold Card and the SAGA Platinum Credit Card, but 99% of credit cards have had the negative (expensive) order of payment I’ve just described.

MBNA (which includes the popular Virgin Credit Card and dozens of other brands) has tried to grab some attention by making the changes early. From September 2010 it has been paying off the most expensive debts first.

Or has it?

The credit card trick that won’t die

Two months ago, I put my cynical hat on (it’s rarely off) and called MBNA to find out exactly how it was going to implement the changes. I learned, incredibly, that it is still not going to quite make the switch to a completely positive order of payment.

Here’s how it’s going to keep doing it. Let’s say you have a 0% balance-transfer deal lasting 12 months and a 0% on purchases deal lasting three months such as the MBNA Rewards Credit Card. (Most cards offer long transfer deals and short purchases deals.) If MBNA was giving us a completely positive order of payment, it would pay off the the purchases deal first during the initial three months. That way, if you have a £600 transfer and a £600 purchase, you could pay off the purchase in three months at £200 per month and be charged no interest in the fourth and following months.

However, MBNA is not doing that. When two 0% deals are running simultaneously,  rather than paying off the shorter 0% deal first, MNBA will use your repayments to pay off the deal that reverts to a higher interest rate. You might have a balance transfer deal expiring in 12 months reverting to 17% and a purchases deal expiring in three months reverting to 16%. Rather than pay off the urgent purchase first, MBNA will pay off the transfer instead. The nub is that you will pay more interest sooner, and most people will pay much more interest altogether.

Back in August, MBNA’s interest rates for balance transfers and purchases were identical but, low and behold, now it has increased the balance transfer rate by a couple of percentage points. That’s all it needs to ensure that, after three months, those people who used both deals and haven’t fully paid off their card will still pay interest.

Extraordinary defiance

Considering the huge pressure from the media and consumer groups, and threats from the government, this just shows how extraordinarily little respect lenders have for customers and authority. It’s clear that treating customers fairly in the financial industry is still a long way off.

These firms have an unfair advantage in their knowledge of marketing and their expertise in cooking up contracts. We could be excellent scientists, mechanics and doctors trying to work hard and be productive, but since we have no training in matters of debt, we could be struggling under it, and being less productive and useful because of it. Lenders, meanwhile, work at nothing other than improving their methods for taking more money from borrowers.

As far as I know, I’m still the only commentator to have realised this trick continues at MBNA. I have read thousands of contracts and have years of practice gleaning these things, but if I’m still the only person to have realised what’s begun here, what chance does the typical consumer have when attempting to read the small print? If the full force of the media, government and consumer groups can’t protect us from these things, I don’t see who can.

What this trick might now cost you

MBNA is still, even after huge and sustained condemnation and campaigning, clinging on to what it can from this old card trick. The good news is the power of negative order of payment has been substantially diminished. Anyone with a few thousand pounds on a new card before these changes might have expected to pay hundreds extra in interest per year. Now the extra interest could be reduced to just tens of pounds extra. Even so, from the many tricks card companies use, it will still remain one of their greatest winners.

Not all card providers will do the same

I called a couple of other banks to see what they’re planning to do. Barclaycard, which will implement the changes on 26 November 2010, said that it will pay off the shortest 0% deal first. In other words, it should apply true positive order of payment, although I won’t relax till I’ve read the details for myself.

Lloyds Banking Group told me it will always pay purchases before balance transfers when the interest rates are equal, regardless of the lengths of the deals. This means if the banking group develops a card with longer purchase deals than balance transfer deals, you’ll meet the same trap as MBNA in reverse. The group comprises of Lloyds TSB, which will implement this new hierarchy on 15 January, and Halifax and Bank of Scotland, which will do so on 20 November.
Credit: Neil Faulkner

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