Repayment Allocation
If you do not pay off the full outstanding balance on your credit card each month, the allocation of your repayment is important. This is essentially the order in which items are paid off. The type of transaction that you make on your credit card affects the interest rate applied. Most card providers will use any repayment you make to first pay off items which earn the smallest interest rate. This means that transactions which incur higher interest rates take longer to pay off, and so your card provider makes more money. A typical repayment allocation is:
1. Interest due on any special offer transactions*
2. Other interest due, any charges and fees incurred
3. Transactions made as part of a special offer*
4. Purchases and balance transfers
5. Cash advances and money transfers
* 'special offers' will differ between card providers. Frequently these offers include reduced interest rates for transactions made at partner stores or 'ethical retailers'; for example, an interest rate of only five percent if you purchase food from a supermarket affiliated with your credit card provider.
Cash advances and money transfers earn the most interest, thus will be paid off last by your card provider, and the interest they earn will continue to increase.
The allocation of your payments is particularly important if you wish to take advantage of introductory interest-free offers, such as zero percent on balance transfers and new purchases within twelve months.
For example:
- You transfer £1,000 to a 0 % balance transfer credit card and take out a cash advance of £100
- You make a repayment of £100 at the end of the month, on your outstanding balance of £1,100
According to the repayment allocation:
- Interest on special offers – 0 %
- Other interest, charges & fees – 28%* APR on cash advance
- Transactions as part of special offer - £1,000 balance transfer
- Purchases and balance transfers - (£1,000 balance transfer)
- Cash advances and money transfers - £100 cash advance
* example rate: cash advance rates are generally high
The repayment you make goes towards paying off the interest charged on the cash advance (typically charged from the day it is made), and towards paying off your transferred balance. It is not used to pay off the cash advance, which continues to attract a hefty interest rate: your credit card balance is no longer interest-free.
You should ensure that you check your repayment allocation, because it may vary between credit card providers. You can find details in the terms and conditions leaflet.
