Watch Out for Negative Payment Hierarchy
Published October 11th, 2007 in Credit Help and Tips.
Most credit card issuers set things up so you pay off the lowest APR charges first, and the highest interest charges last.
At first sight, it doesn’t sound like a big deal, or necessary a bad deal, but open closer inspection, you’ll see why many card issuers choose this payoff structure.
Imagine you execute a balance transfer, moving $2,000 to a new credit card with 0% APR for 12 months, but 25.99% APR on purchases.
Then you decide to make a purchase with that credit card, adding a $250 charge to the existing $2,000 balance.
Over the following 12 months, if you continued to carry and slowly pay off that $2,000 balance at 0% APR, you’d be accruing interest on the $250 purchase if your card issuer uses a negative payment hierarchy.
Because the purchase APR of 25.99% is higher than the 0% APR from the balance transfer, it won’t be paid off until the $2,000 is wiped out.
That could mean months and months of accrued interest on a seemingly innocuous purchase, leading to a nasty surprise down the line.
For that reason, I recommend setting aside the credit card you used solely for a balance transfer to avoid any extra charges that will throw off the 0% APR nature of the card.
To avoid confusion, use another credit card for purchases, that way you won’t get caught with a high APR charge waiting in line to be paid off behind your lower APR charges.
