DTI tackles adverse credit card payment hierarchies

Certain tactics used by credit card companies to extract an estimated £500 million a year from customers are to be exposed by a new government ruling.

Credit card companies will soon be forced to make the order in which customers repay their debt more explicit after the Department of Trade and Industry (DTI) announced its crackdown on the practice of negative payment hierarchy.

Under this practice, credit card holders will find that they pay back low interest debt first while higher interest debts continue to collect interest independent of the order in which the debt was amassed.

The DTI’s decision means that, starting October 1st 2008 credit card companies will have to list the order of repayments on the customers’ statements near the total balance.

Nationwide, whose customers pay off the expensive parts of their debt first, had campaigned for the word "warning" to appear in the disclosure statements where adverse order was applied to repayments.

Nationwide director, Jeremy Wood, said: "Many credit card providers use low introductory rates to lure people into opening an account."

He added: "Most providers apply repayments to the cheapest debt first making it more expensive for you and more profitable for them."