The end of 0% credit cards?

15 March 2010

The days of 0% balance transfer credit cards could be numbered as a result of new rules designed to protect consumers from unscrupulous credit card company behaviour.

New rules unveiled by the government this week will ban credit card providers from using customers’ payments to clear balances attracting the least amount of interest before more expensive debt.

This payment structure, known as negative payment hierarchy, costs consumers dearly.
For example, let’s say you have a £1,000 balance transfer that is interest free for 12 months plus a £500 purchase balance earning 17% APR.

Because of negative payment hierarchy, you will need to make two months’ payments of £500 before your balance transfer is paid off. In the meanwhile, your £500 purchase balance is attracting interest of 17%.



Over 79% of credit card allocate repayments to the cheapest debt first, according to Defaqto. The ban will benefit the estimated 40% of cardholders who don’t pay off their balance in full each month that are subject to more than one APR on their total balance.

Currently, only Nationwide and Saga use positive payment hierarchy – where payments clear the most expensive debts first.

David Black, banking specialist at Defaqto, says: “[The ban will] alleviate some of the lesser known tricks of the trade that have proven extremely costly to those who don't repay their entire balance every month.”

However, there are concerns that once the new rules are implemented later this year, credit card providers will attempt to recoup their losses. The UK Payments Association estimates cost of this package of changes to be around £533 million over the first two years.

Joanne Garcia, head of credit cards at, welcomes the negative payment hierarchy ban but says the move will be “another nail in the 0% balance transfer card coffin”.

This could mean shorter 0% introductory periods, bigger balance transfer fees and higher interest rates. Some credit card providers may stop offering 0% cards altogether – and less competition means consumers will lose out.

Alternatively, Peter Harrison, credit cards expert at, believes providers will fight back against the ban by increasing interest rates across the board. He also warns annual fees could be introduced as a way of clawing back lost revenue.

‘Hidden’ fees such as foreign exchange commissions and other charges for card use abroad will more than likely be adjusted to replace this lost revenue.

“While the short-term benefits will be felt by as many as 40% of all cardholders, the majority will see higher rates and potentially the reintroduction of annual fees as a result,” says Kieran Hines, lead financial analyst at Datamonitor.

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