Negative Payment Hierarchy And Four Ways To Beat It

Post by Sharat on April 13, 2009 · Under Featured Articles, Hints and Tips, Personal Finance, Self Help, banking, credit cards, interest rates, loans · Comment 

Credit card issuers use a variety of surreptitious methods to charge their customers higher interest rates, here are a number of tips to ensure customers stay ahead of the curve, and beat the card companies at their own game.

0% card deals are an excellent way for borrowers to come to terms with their debts quickly, before transferring one’s debt on to a 0% credit card there are certain issues that borrowers must come to terms with, the most important is negative payment hierarchy.

Payment hierarchy basically means the order of repayment for different types of debt such as balance transfers, new purchases and cash advances. Payment hierarchy can either be positive or negative.

Most credit card companies operate using negative hierarchy, which means the cheapest or lowest interest bearing debt must be paid of first by the borrower, whilst the most expensive high interest debt is paid of last.

At first glance negative hierarchy does not seem fair, customers are forced to hold on to their most expensive debt, whilst paying of their non interest bearing debt such as balance transfers, and have no say in the matter.

In fact the practice is unfair, and the US Government is looking at banning the practice altogether and making positive payment hierarchy, the practice of allocating any repayments to the most expensive interest bearing debt first, compulsory.

Four ways to beat negative payment hierarchy

1. Use one card for balance transfers and a different card for spending.

If a specific credit card carries only one type of debt then payment hierarchy becomes irrelevant and any repayment made to either of those cards is used to pay off the debt carried on the individual card.

2. Use a card which offers the same 0% deal on balance transfers and purchases.

Using this type of card ensures that all the debt carried on the card is the same, borrowers need to watch out for how long the interest free period for purchase made on the card lasts for. Very often balance transfers incur an twelve month interest free period, whilst purchases have a lower 3 month interest free period.

3. Choose a card which operates positive payment hierarchy.

These are few and far between

4. Finally, don’t borrow on a credit card at all.

Consumers who pay off their balances in full at the end of every month carry no risk of falling foul of negative payment hierarchy.

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