One of the worst features of credit cards is what is known as negative payment hierarchy. An example of this if the borrower undertakes a balance transfer to a zero balance account, the interest on the balance transfer is zero, whilst if the borrower uses the same card to make a new purchase, that purchase will attract interest.
Negative payment hierarchy is when credit card companies use any payment made to pay off debt which is accruing at low or zero interest, whilst the debt which carries higher interest continues to accrue charges at the higher rate.
Australian banking major NAB is seeking to end its practice of negative payment hierarchy, and has flipped it on its head by allowing its borrowers to pay off their higher interest debt first.
Negative payment hierarchy is an industry wide practice according to NAB personal banking group executive Lisa Gray.
“This will no longer be the case for NAB customers, credit card transactions attracting the highest interest rate will be paid off before the lower interest rate, helping to reduce the overall interest cost to our customers.” Ms. Gray said.
The changes imply that all balance transfers will shift to the lower interest rate at the end of the introductory period, which will reduce the interest charges for borrowers.
The new systems will apply to all NAB consumer and commercial credit cards, which total about 1.5 million accounts, the bank said.