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Banks making a mint on balance transfers, UK lender says

Nationwide Building Society is urging people to turn their backs on credit card providers who make an estimated GBP500 million extra in profit every year from the way they allocate payments.

Almost all UK card providers choose to allocate payments first to outstanding balances at the lowest rate of interest (for example, 0% balance transfers), leaving balances at higher interest rates, such as purchases and cash advances, to continue to accrue interest.

Although order of payments has a significant impact on how much interest credit card customers pay, it would appear that many are still unaware of how payments are applied to their accounts. This is largely due to providers failing to state on credit card statements the order in which payments are allocated.

Research carried out for Nationwide shows that over 40% of consumers do not know that most credit card providers who offer a low introductory rate use repayments to pay off the cheapest debts first. Furthermore, over 30% of customers who open credit card accounts to take advantage of these introductory offers do not understand order of payments. Therefore, they are unaware they will not benefit fully from the low rates.

Many credit card providers use low introductory rates to lure people into opening an account. These offers can look very appealing, but when you scratch beneath the surface you discover that credit card holders often don’t receive the full benefit of these low rates, says Nationwide executive director Stuart Bernau.