My growing suspicion that I get handed the bulk of the nerdy exciting tasks at MSE towers was further bolstered today as Martin’s asked me to cogitate on The AA’s new style of repayment hierarchy on its relaunched credit card.
Before you all nod off, a quick intro. Though they sound dull as ditchwater, repayment hierarchies control exactly how long it’ll take anyone with credit card debts to repay their balance, and manipulating them to your own ends can save you £100s, or even £1,000s!
When you make a credit card repayment, most lenders use it to clear cheap credit card debts (eg, 0% balance transfers) ahead of expensive ones (eg. withdrawing cash at 25% ish). This means the expensive debt takes longer to get rid of, and costs more in interest in the meantime. The simple way to beat this is follow our Golden Rule of NEVER EVER EVER spending on a card that you’ve used for a cheap balance transfer, or vice versa.
Sadly, The AA’s new offering doesn’t deviate from the norm in this respect, still deciding to bias repayments towards clearing the cheap debt. However, another of its features intervenes to make this offering a little different, and made us tentatively suggest that ignoring the Golden Rule, in this very specific set of circumstances, might not be as painful as usual.
Because the length of the two 0% periods don’t quite match up, we normally shout loudly that the golden rule should be obeyed, else you’ll be hit by interest charges once the shorter 0% period ends (in this case, the one for new spending).
However, The AA have decided to be nice in the second part of their repayment hierarchy, stating
“If introductory rate balances are the same we will repay them as follows: the one which expires first;”
Imagine that Max the MoneySaver uses the card for both a 0% balance transfer when he first takes it out, then a bit of 0% spending. Providing he makes monthly payments of a reasonable size, it’s likely he’ll clear the spending debt by the time the 0% offer ends, because these are repaid first, ahead of the 0% balance transfer debt.
The worst case scenario arises if he still has spending debts by the time the first 10 months are up, as they’ll start to accruse interest at 16.9% APR. However, as the balance transfer 0% deal only runs for an extra two months on top of that, if there’s still a substantial outstanding balance, he should already be scouting about for some new top plastic for debt switching.
So there you have it: a bit of positive repayment hierarchy, and a bit of negative. The sum of the parts? AA has slammed its car into neutral – and almost confused our Golden Rule in doing so!
Discuss this blog: The AA changes gear to ‘neutral’ on new credit card