Wealth Finance

If you have never given much thought to how your credit card balance is paid off then you are not alone. It’s definitely worth knowing a bit about it, however, as how your outstanding balance is paid off can have an effect on how much you end up paying in the long term. Luckily for consumers, credit card issuers are now required to adhere to something called the positive payment hierarchy.

But what is this and how does it work? Essentially, the positive payment hierarchy exists to make sure that any credit card debt that is charged at a higher rate of interest than the rest of your balance is paid off first. The idea behind this is to help to limit the amount of interest that is paid on purchases.

For example, this often applies to balance transfer cards. If you transfer a balance from an old card to a new one, you will usually be able to pay off the transferred balance at a 0% rate of interest. However, any new purchases you make will be charged at the standard rate of interest – let’s say 18%. Under the positive payment hierarchy, the balance charged at 18% would be prioritised and paid off first, leaving you with less interest building up if you choose to pay off the minimum amount each month.

This is one of the benefits of credit cards and it applies to all credit cards on the market, so no matter what type of card you have, if you make purchases at different rates of interest, the higher rate will always be paid off first. Of course, if you choose to pay off your card balance in full every month then you will avoid paying interest in the first place, but for those who pay off the minimum amount each month, it’s a useful mechanism that can help you pay off the balance faster.

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