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Allocation of payments, sometimes known as order of payments, is a clause listed in the terms and conditions of every credit card.

It regulates the order in which payments credit cardholders make to their account will be applied to an outstanding balance.

How payment allocation works

Cardholders look at their credit card statement and see one outstanding balance to pay. Say: £1257.78.

However, the credit card provider would look at that same account and see:

• £9 in interest charges - accruing 22.9% p.a. interest
• £40 for cash withdrawals - accruing 22.9% p.a. interest
• £208.78 in purchases - accruing 16.9% p.a. interest
• £1,000 as a balance transfer on a promotional rate of 0%
• Total - £1257.78

When the cardholder pays a portion of the outstanding balance the credit card provider clears the balances accruing interest at the highest interest rates first.

So, to continue with the example above, if the cardholder pays back £49 they'll clear the two balances which would otherwise continue to accrue interest at the card's highest rate: 22.9% p.a.

In general, but not in every case, then, the high to low order of repayments rule pays off credit card balances in the following order:

• Interest and fees
• Insurance premiums (PPI or ID theft insurance, for example)
• Cash advance transactions (including ATM withdrawals and foreign currency purchases)
• Standard rate balance transfers
• Standard rate purchases
• Low promotional rates (life of balance transfer offers, for example)
• 0% promotional rates

Should I worry about allocation of payments?

Once upon a time, just over a year ago, credit card providers were free to allocate payments in any way they wished.

Unsurprisingly, many chose to apply monthly repayments in a way that maximised their profits: paying off the cheapest balances first and letting the most expensive ones sit accruing interest for months on end, until the card balance was paid off in full.

The current high to low repayment rule was bought in after a consultation between Government and the credit card trade body the UK Cards Association forced providers' hands.

It is now much fairer, and much less of a worry to credit cardholders in general.

When to worry

However, there are still a few instances in which a seemingly simple rule governing payment order can end up being a complicated expense.

Using two 0% offers at once

The primary example to be aware of is a complication that can arise when cardholders are using two or more 0% introductory offers at once.

Let's invent another imaginary credit card to explain the problem, a pretty good one with a 12-month 0% balance transfer offer and a 6-month 0% purchase offer.

The cardholder transfers £1,000 from another credit card, uses it to spend £1,000 and then makes a monthly repayment of £200.

Now, should the credit card provider take that £200 from the purchases balance, because it's shortest, or the balance transfer balance, because it will eventually accrue interest at the highest rate?

There are two schools of thought on this, as follows: MBNA and everyone else.

MBNA: It's MBNA's approach that's the problem.

If the cardholder above continued to make a £200 monthly repayment for six months they might well expect that, at the six month mark, the 0% purchases balance would be paid off entirely.

In fact, more or less the whole purchases balance would start accruing interest because where there are two balances at 0%, MBNA allocate payments first to the balance with the highest eventual rate first - which is often the balance transfer.

There are a few ways around this.

Cardholders could resolve to just pay off the purchases balance in full when it starts to accrue interest, paying as little as possible to the provider.

Alternatively, they could consider holding two separate credit cards for the 0% balance transfer and another for a 0% purchase period.

Although perhaps the simplest option for people who need to use both 0% deals are those offering an equal length 0% on balance transfers and purchases.

Finally, they could simply avoid spending on the card until the 0% purchases period is over - although note though that some interest will still be unavoidable even then as the entire balance needs to be repaid in full for any standard interest free period to apply to purchases.

(Mostly) Everyone else: As you may have guessed from our explanation, we think that the way most other providers allocate payments to two 0% deals, the shortest first, makes much more sense.

Those that want to use two 0% deals have a fifth alternative to add to those above, then: choose a deal that repays the shortest 0% offer first.

Note that, as well as MBNA-branded credit cards, MBNA-run deals from providers such as Virgin Money and the AA are subject to this allocation of payments quirk.

Always check small print before relying on a certain order of payments though - not all other providers will repay the shortest 0% period first for example.

Interest-free periods

It's also worth noting that credit card interest-free periods can be a complicating factor when working out the amount of interest due on a balance.

Only purchases made on credit cards generally enjoy an interest-free period (with some exceptions, see our credit cards and cash withdrawals guide).

This standard period of around 50 days applies when the credit card statement balance is paid off in full by the due date.

When only a partial payment is made, the interest-free period does not apply and interest on the relevant debts will be backdated to the transaction date, and continue to accrue.

In short, the high-to-low repayments clause is not, unfortunately, a way to chip away at a few balances and avoid interest altogether.

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