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The cost of clearing debt

10/06/2010

Figuring out the cost of clearing debt can be tricky, as a recent press release from moneysupermarket.com demonstrates.

The press release estimates that 63% of balance transfer card users have fallen into the `payment hierarchy trap` by using their balance transfer card to make a purchase.

Due to the way many credit card companies handle their customers` payments, clearing the debt on even a small purchase can end up costing them much more than they expected.

Why? A card might charge 0% interest on the balance that was transferred to it, but that doesn`t mean the debt from a purchase will be interest-free. The interest on `purchase` debts can easily be around 18%. This is particularly important when the customer`s payments won`t go towards that debt until the entire `balance transfer` debt has been paid off - so it could well be sitting there (accruing interest) for many months or even years.

As moneysupermarket.com calculates: `Making a purchase of just £50 on a card with an existing balance transfer of £2,500 could cost up to £106 in interest over 12 months, due to the higher APR rate for purchase transactions.`

Not all credit cards work like this. Some already use a `positive payment hierarchy` (where payments clear the highest-interest debt first) - and some will start doing so before the end of the year, when all credit card providers will start treating debts in this way.

"Debt is a complicated subject," said a spokesperson for Debt Adviser Direct, "and it`s easy for people to end up paying more than they`d expected just because they didn`t know how the interest on the debt would be calculated. It`s well worth talking to a debt expert and asking their advice - the better someone understands their debts, the easier it should be to stay on top of them."

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Debt Advisers Direct offer free debt advice and a range of debt solutions, including debt management plans, debt consolidation loans and IVAs (Individual Voluntary Arrangements).

Consumers took on more mortgage debt in July 26/08/2010 - Consumers took on £2bn more mortgage debt than they repaid Debts called in by parents 26/08/2010 - According to research, `the bank of Mum and Dad` is Teenagers `scared of debt` 19/08/2010 - Nearly two thirds of teenagers are `scared` of debt, according Rising household costs could pressure people in debt 10/08/2010 - The UK may be about to see a rise in