pay off highest interest rate first

jonchef

Now that most credit card companies have changed their policies about using payments to pay off ammounts with the highest rates of interest first, has this changed the advice about not spending on cards that you have done a balance transfer on? I am tempted to try it but wanted to check to see if other members of the forum have done this already?

ironlady2022

Balance transfers may be 0% but purchases may not be so you need to be careful.

chattychappy

Yes it can do, but really it comes down to circumstances.

Eg let's say you have £10,000 outstanding on a 0% APR deal which has 12 months to run and the min repayment is 3% - ie £300 (in the first month).

If you don't use the card, that means in the next month you must reduce the balance by £300, and that £300 will come off the 0% deal. Ie that is £300 on which you'll be no longer getting a 0% deal.

Let's say that instead you put £300 of spend through the card JUST BEFORE the statement is generated. The balance will be £10,300 (plus a tiny amount of purchase interest). The required repayment will be 3% £10,300 - ie £309. So you pay £309 - £300 will go against purchases, and £9 against the BT. So that's £291 for another 12 months that you will now be getting 0% on that you would otherwise have had to have pay back.

Of course you have to weigh this carefully. If your purchase rate is high and you put the spend through a couple of weeks before the statement is generated and/or delayed making the min payment then you could incur significant purchase interest. Also by playing this game you are forgoing getting up to 56 days interest free by putting purchases through a card which you pay off monthly. But depending on how much of your offer you have to run, I think this is a price that could be worth paying.

In some T+Cs the hierarchy is not strict. Ie payments are always applied to stuff that has appeared on a statement (even at a lower rate) before stuff that has yet to appear. Hence you have to be concerned about statement dates or be sure that that the hierarchy is strict regardless of whether something has appeared on a statement yet. (I have seen it drafted both ways on T+Cs.)

For something like Zero where there is no charge for cash withdrawals, you can effectively reduce your minimum repayments to near zero by making a cash withdrawal of a similar amount just a statement is generated and using it to make a payment just after generation. This is good for maximising the value you get out of your 0% deal by carrying a greater balance throughout the deal. Of course you have to face the reality of paying back a larger amount when the deal ends as you've subverted the min payment system. It is also possible (unlikely in my opinion) that this behaviour will be flagged up and stopped. It has previously been suggested that cash advances have a negative impact on credit ratings - but I've had no problem and use Zero alot for cash withdrawals abroad.

Apart from the games above, I think the general answer is yes, the advice doesn't apply any more. But you really do have to run the maths for the particular case you are considering.

jonchef wrote: »

I am tempted to try it but wanted to check to see if other members of the forum have done this already?

Yes, I have done this already with MBNA which changed a little while back.

jonchef

Thank you very much for your detailed reply chattychappy.
I have just been offered 0% balance transfer for 6 months on my Barclaycard cashback. but if I take it and no longer use the card I will have reduced my credit faciliy, unless I try applying for another card.
It's quite exciting to be get offered a 0% again though after a year of chipping away at a big debt and being considered uncreditworthy.

If I do take the 0 % offer and continue to spend on the card, I will have to be very careful to work out exactly how much I need to pay back each month to avoid interest charges. Thanks again

chattychappy

You will pay some interest. Because you're not clearing your balance in full, you will pay purchase interest between the date of purchase and when your payment is applied to that purchase.

If you're planning to pay down the debt during the 0% period, you might be better off putting purchases on a separate card and benefiting from the interest free period you get when you pay of the card in full each month. This assumes you can pay both the minimums on the 0% deal, as well as current purchases in full. (Hopefully you can!)

jonchef

I don't follow why the up to 56 days no longer applies to purchases if you have made a balance transfer on the card?

danouk

You have to clear the statement *in full* to benefit from the interest-free period. If you don't clear the statement in full, you pay interest on the full amount, from the date(s) of the transactions.

I don't think there's anything to "follow" here, it's just the way it works...

jonchef

I just called Barclaycard to check the situation with them and I was told by one of their customer advisors, that because of the new repayment policy (your monthly payment now pays off the ammount with the highest interest first) even if you make a balance transfer the rules regarding purchases remain the same i.e you get up to 56 days interest free and you don't lose the balance transfer rate. This is the second time I have called them and the previous advisor said the same thing.

I raised this in the forum not just for my own benefit but also to help clarify the situation for other people who may not be able to get a second card to spend on. The change in repayment policy of most of the credit card companies now means that the old advice of not spending on a card that you make a balance transfer on is not necessarily the case. Obviously you have to be careful to pay off your purchases at the end of each month to avoid interest charges though.

chattychappy

jonchef wrote: »

I just called Barclaycard to check the situation with them and I was told by one of their customer advisors, that because of the new repayment policy (your monthly payment now pays off the ammount with the highest interest first) even if you make a balance transfer the rules regarding purchases remain the same i.e you get up to 56 days interest free and you don't lose the balance transfer rate. This is the second time I have called them and the previous advisor said the same thing.

I raised this in the forum not just for my own benefit but also to help clarify the situation for other people who may not be able to get a second card to spend on.

Thanks, very interesting.

I will cautiously try this on Barclaycard next time I'm in the UK to see if they've actually implemented it this way. (I have a LOB deal running.)

I don't remember seeing their T+Cs saying it would operate this way, though this wasn't something I was specifically looking for.