By Stephen Jones
In our new Credit Card Spotlight series, we give you a brief rundown of what’s happening in the world of credit cards and how it affects you. This month we’ve seen a tide-change in the way your debts are paid off, the rise of rewards cards and a bold move from Natwest that could set the market alight.
Allocation of Payments
The AA, Virgin and MBNA have both announced changes to the way customers pay off debt on their credit cards – this is called the allocation of payments. Effective from 1 September, both companies will change the payment hierarchy on their cards, meaning that users will pay off the most expensive debt first.
Under an agreement between the government and UK Cards Association, all providers will have to do this from the start of next year; however it appears that some are trying to get ahead of the game and sweep up customers beforehand.
So what does it mean for you? Here’s a quick example...
Mr Myers has a £1,000 balance on his card. While most cards have a headline rate of APR, they are actually broken down into different ‘buckets’ within that, which usually have different rates of interest entirely. Let’s say that it is split up as so:
Cash withdrawals £200 charged at 25% APR
Balance Transferred £500 charged at 0% APR (as in intro period)
Purchases £300 charged at 18% APR
If this was the case, the annual value of debt that attracts interest would be £104. However, if he paid off £400 under a negative hierarchy - which many card providers still use - this would be used by the company to pay off his cheapest debt, which in this instance has no interest whatsoever. That means he’s still paying the same amount of interest despite reducing his debt by 40 per cent, as indicated below.
Cash withdrawals £200 25% APR
Balance Transferred £100 0% APR (as in intro period)
Purchases £300 18% APR
So the two interest-bearing ‘buckets’ remain untouched, and the interest paid is still £104. Once the ‘shield’ of the balance transfer debt has been fully paid off, any subsequent repayments would start to eat into the balances of those two money-making debts, starting with purchases in this case as that carries the lowest interest.
While we can all look forward to the end of this practice from next year, there is a little thing to consider before we all celebrate too much. As it's likely to cost credit card companies an awful lot in lost profits, we should perhaps expect some of the more attractive deals to be pulled off the market eventually to cover the cost. As a result, it might be wise to think about snapping up some of the best credit card deals before they disappear altogether.
The Rise of Rewards
Around two months ago, Barclaycard introduced their Freedom reward scheme, which we predicted would lead to a flurry of other providers offering similar incentives. Egg has become the latest to get in on the act with the Egg Visa Card – offering what they describe as a "typical 10 per cent cashback" on purchases from more than 1,500 retailers.
However, this is only available when buying things through the cashback store site, using the links they give you, so make sure you know exactly what you're getting before you apply.
We see rewards as the future – as mentioned above, credit card companies are likely to feel the squeeze with changes to the market in the coming year, and as a result they’re having to get more innovative to provide attractive offers. If you’re looking for a card for purchases, keep your eyes peeled for more exciting offers in the near future.
The Land Grab
Natwest and Royal Bank of Scotland last month opened up their Platinum MasterCard to the whole market, setting in motion a potential land grab. Previously available to existing current account customers, it offers a 15 month introductory balance transfer term, making it a pretty attractive prospect if you’re hoping to shift existing debt.
As a result, the card is now a market leader among the major providers, and could spark some much-needed activity after a long static period. Will we see a rush to grab customers as other issuers test the water? Watch this space.
Top Tip
This month’s top tip might sound obvious, but it’s amazing how easily it can be forgotten in the bewildering world of credit card hunting. Alex Higgs, our commercial analyst, offers the following wise words:
“If you want to play the credit card game, it’s crucial to keep a clear head. Don’t just be blinded by the best rate – there’s plenty more to consider, and the most important thing is that you find the card that best suits your needs.
“If you can afford to pay off the balance every month, then by all means use credit cards to get free rewards. However, if you have a balance you revolve, don’t be charmed by the fancy stuff – the key is making sure you pay as little interest as possible.
“Once you know which category of card suits your purpose, make sure you take advantage of the web to compare – our free credit profiling tool will even tell you which cards you are likely to be accepted for, and won’t leave any footprint on your credit file.
“Finally, be realistic. We’d all love to get a super platinum deal, but sadly that’s a pretty exclusive club – before you apply, be sure that you know what doors your credit history can open for you.”
