This article reveals the truth about how banks allocate the monthly repayment in the bank’s interest by establishing a hierarchy predicated on the various interest rates they charge, so that holders of cashback credit cards will always be punished, whatever action they take. It also shows why it is important to renew your plastic once the opening cashback credit card offer time finishes.
A leading finance lender lately started a television campaign which made great play about the awful truth that a large majority of card suppliers split up usage habits into various categories then allocated a different interest rate depending on which category was taken into consideration. These different levels were based upon the perceived spending models of the average credit card holder. Such people include holders of cashback credit cards.
If you go by the advert, a large majority of credit card companies presume that the card user will start by transferring the balance from a previous card (thereby wiping the balance out) for an average period of 39 weeks. This will be at zero percent interest rate for that time. The credit card owner will then make a new purchase using his or her plastic which will on average draw an interest rate of approximately 15%.
The card user may also use the cashback credit card for getting some ready cash. Your interest rate for cash is set higher than the rate charged for purchases, and this is on average between 19% and 21% but which might reach as high as 23 percent or over.
Now here’s where the trickery starts. As the monthly payment comes around, the cashback credit card lender will ensure the less costly purchase items are at the head of the list when the time comes to pay the minimum, or whatever proportion of repayment has been decided by the card holder.
Thus the most expensive parts of your credit card usage – and that’s usually the cash component – is put right at the back where it will rack up more interest, and where all that interest will be further compounded when interest is charged to the existing interest (we all know how it works, don’t we?)
The cashback credit card user may believe that they are clearing things in a uniform manner, and that if one type of cash attracts a higher interest rate then that will be balanced out by the goods purchase which will be charged out at a lower interest rate. The reality is very different. Because the bank will always put the less costly portion first in the paying hierarchy, and allow the more expensive parts to just sit there accruing interest.
These higher interest rate segments will thus always be the last to be paid. In the average case, for the first 9 months of this cashback credit card all the repayments will be used to pay the zero interest portion while the new purchase and the cash component remain clocking up interest.
More importantly, the more expensive parts will always be at the back, always being paid off last. Last to go will be that cash advance, with its massive 21% or whatever it is. It is ironic to think that the longer the 0 interest period, the longer the interest will rack up! Then when you add on the fee that most cashback credit cards nowadays charge for making that balance transfer, then you know why the credit card companies are making so much money.
The only credible solution is to dump the cashback credit card and transfer the balance to a new card when the interest free period ends. Based on what we’ve seen the banks do as a matter of course, that really is the only option. No exceptions.