Order of payment on credit cards

The system for paying off outstanding balances on credit cards has been criticised at the second reading of the Consumer Credit Bill. At present, many credit card providers allocate payments to balances with the lowest rate of interest first. The effect of this is that lower interest balances, such as balance transfers, are paid off first, whilst items accruing higher rates of interest, like purchases or convenience cheques, are paid off last. Because the higher interest balances are last in line when paying off debt, more interest than is necessary accumulates, costing the consumer more than is necessary. Nationwide building society has denounced the practice as unfair and estimates that it boosts credit card providers’ profit by 500 million GBP.
The Treasury Select Committee and the Office of Fair Trading (OFT) have also expressed concerns about the practice. The 2004 report into credit cards by the Treasury Select Committee advocated that consumers be explicitly ‘warned’ when payments weren’t put towards the debt accruing the highest interest.
Similarly, the OFT has previously suggested that the law should stipulate that payments of debt automatically go towards the highest-interest debt ‘unless it is expressly agreed between the borrower and the lender’.