99% Of Credit Cards Use This Dire Trick

There is an expensive, hidden trick that card companies use to make lots of money from 0% deals (and we don't mean the transfer fee). We list the 1% of cards that don't do it!

If you already know what 'payment hierarchy' is, skip to the table below to see the four credit cards that have fair terms. For those who don't know what I'm talking about, I'll explain now.

When you have more than one type of debt on your credit card (e.g. a balance transfer, a purchase and a cash withdrawal), what order are they paid off in? In other words, what is the 'payment hierarchy'?

A 'positive payment hierarchy' is when you repay the most expensive debt first, i.e. the one with the highest interest rate.

So, let's say that:

 You've done a balance transfer, and you've got a 12-month deal at 0%.
 You've made a purchase, and are being charged 16.9% APR for it.
 You've withdrawn cash, and are being charged 23% APR for it.

With a positive payment hierarchy, you pay off the cash withdrawal first, so your most expensive debt is being cleared earlier. Then you pay the next most expensive, the purchase. And finally you clear the 0% balance transfer. This way, you pay the least interest possible.

With a negative payment hierarchy, however, the reverse is true. You pay off the 0% debt first, whilst your purchase and cash withdrawals remain on the credit card racking up loads in extra interest.

Today I trawled through the small print of 300 credit cards. Of these cards, just four (1%) had a positive payment hierarchy, and one a semi-positive (maybe!). That means 296 (99%) had the nasty negative payment hierarchy! This explains why so many credit cards offer 0% balance-transfer deals, because the card providers hope you'll use the card for purchases and withdrawals too.

Let's look at the exceptions though:

The four credit cards with a positive payment hierarchy

Nationwide is probably the industry leader when it comes to fair terms in contracts. All three of its credit cards continue to have a positive payment hierarchy. The only other card I could find was Saga's, although it doesn't offer a 0% deal, just 5.9% on balance transfers for six months, for which you are still charged a fee (2%).

There is another card that appears to be semi-positive: ASDA's Credit Card. It looks as though it's positive if you don't do any cash advances (which include such things as withdrawing cash or gambling). However, the details weren't clear in the small print, so be wary (as always).

As a little aside, The Fool always vigorously suggests that you don't use your credit card for cash advances, because there is no interest-free period and the interest rate is always very high.

The data I sifted through for this article was from Moneyfacts. It was dated July, but there has been no change in the market since then that would prompt providers to improve their terms. Even so, before taking any card, make sure you check the payment order. A positive order should read something like this in the small print:

'Payments in excess of the minimum are applied to the highest interest rate bearing balances first, ahead of those that attract a lower interest rate.' (Taken from Nationwide's terms and conditions.)

The 300 cards I searched are the vast majority, but if you know of any others with a positive hierarchy, please let me know. Ask Fools on our Credit Cards & Loans discussion board if you're unsure about any terms and conditions.

Soon I'll write about three strategies that enable you to avoid negative payment hierarchy, which will leave you even better off than using the above credit cards!

> Read about 0% Cards With No Balance Transfer Fees!
> Compare credit cards through The Motley Fool.