Credit card users expect highest interest rates to be paid off first

Millions of us that use a credit card expect our highest interest rate balances to be paid off first, according to research commissioned by credit card company MBNA.

Under current industry practice, when customers make a minimum or part repayment (as opposed to paying off the full monthly balance) – most credit card providers allocate this to the lowest interest rate charges first, rather than the higher interest rate charges.

However, despite the best efforts of the industry to raise awareness of the way credit cards work, millions of customers continue to be unaware that this is the case - with 40% of users in the survey expecting higher interest rates be paid off first – not necessarily the case with most lenders.

Europe’s largest credit card lender, MBNA made these customer-friendly changes in September 2010 – four months before the vast majority of the rest of the industry is expected to follow suit.

On January 2011 a new joint industry and government agreement comes into force. From this date, all credit card providers will be required to allocate payments to the highest interest rate charges first.

The reversal in what is known as ‘allocation of payment’ practice could benefit the 40% of credit card users – approximately 12.1 million adults in the UK – who do not usually pay off their full credit card bill every month.

The study also found one in ten credit card users don’t realise that, when using a credit card, different transactions – like purchases, cash withdrawals or balance transfers – incur different interest charges.

In this video, John Greaves explains why MBNA have decided not to wait till January 1st to bring in the change and what it will mean for their customers.