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| What is negative payment heirarchy | |
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It’s a long phrase – “negative payment heirarchy”, and it doesn’t sound like it’s a good thing, but what does it actually mean? Very simply – when you have a credit card you can get charged different interest rates if you use it for different things. For example, you could use the credit card for making a purchase, and the interest rate could be (just an example) 14.9%. Negative payment heirarchy means you pay the cheapest debt off first – so get stuck with the most expensive one for longest (so the credit card companies get more interest from you) Say you use the same credit card to withdraw £50 from a cash machine. On this amount you’re going to get charged a higher rate of interest (pretty much every credit we know of charges more interest for cash withdrawals), let’s say 18.9% This means you now have an outstanding balance – and on one part of it you’re paying 14.9% interest, and on another 18.9%. You’re going to be paying these interest rates until you’ve paid off the balance. But wait, let’s say you pay a bit of the balance.. which part are you actually paying back, and what interest rate are you now being charged? Negative payment heirarchy simply says that when you pay off the balance, the money pays off the cheapest debt first. So the more expensive debt is the one that remains until last. This becomes really important if you’ve done a balance transfer for a promotional period. If you’ve transferred lets say £1000 and have 0% interest on this for 12 months then you should not have to pay any interest. If in the first month you then use that same card to buy something for £100 then you’re going to be paying interest on this until you’ve paid off the full debt (£1100). This could really add up.. Not all cards have negative payment heirarchy but have a close look when you’re checking them out – some of the best cards can be found on the student credit cards comparison page. |
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