Credit cards - what does payment order mean?

Very few of us understand (or even read) all the terms and conditions that come with a financial product like a credit card or an overdraft. The technical terms can be bewildering, and we might feel that all we need to know are `the basics`.

However, it`s important not to overlook the importance of some of those technical terms - like `payment order` (also called `order of payment` or even `payment hierarchy`). This basically means, as the name says, the order in which the different kinds of debt on that credit card will be paid off.

On a credit card, those different kinds of debt could include balance transfers, purchases and cash withdrawals. After all, a lot of people will want to use their credit card for a range of different things - not just buying things in the shops (or online), but consolidating multiple debts onto one card.

And occasionally, they may decide to use it to get some cash in their hand when they need it, without needing to approach a lender or talk to their bank about extending their overdraft limit.

Some people might choose to hold more than one credit card and use each one for a different purpose - but for people who use one credit card for everything, it`s important to understand what effect the payment order will have on the interest they pay.

Why does the payment order matter?

The reason the payment order matters so much is that those different kinds of debt can come with very different interest rates. It`s perfectly possible for a credit card to charge 0% on any balance that`s been transferred to it, but 17% on purchases - and 28% on cash withdrawals made using that card.

So it really matters which one is paid off first.

Positive payment order

If your credit card has a `positive payment order`, your monthly repayments would go towards the debt with the highest interest rate to begin with, and would only start paying off the other (cheaper) debts once that had gone.

In other words, your most expensive debt would be cleared first, leaving the others accruing interest - but not as much interest as the high-interest debt would have accrued!

Negative payment order

If your credit card has a `negative payment order`, your monthly repayments would go towards the debt with the lowest interest rate to begin with, and would only start paying off the other (more expensive) debts once that had gone.

If, for example, you have transferred a total of £2,000 from other credit cards (during a 0% introductory period) and used the card to withdraw £300 in cash (at 25%), that £300 wouldn`t be touched until the balance from the transfer had been completely cleared. Depending on how long it takes you to clear that `balance transfer` money, that £300 withdrawal might end up costing you a lot more than you`d expected - at 25% interest, a £300 debt would grow by £75 every year...

Positive payment order - some positive news By the end of the year, all credit card providers will have to use a positive payment order. That`s clearly good news for credit card users across the country.

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Related resources:

• Credit cards
• Credit card guides
• Credit cards: glossary of terms
• 0% purchases
• 0% balance transfer
• 0% balance transfer & purchases
• Low-rate credit cards
• Rewards / cashback
• Credit cards for bad credit

Tags: credit cards, payment order, payment, credit card payments, repayments, interest, interest rates

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