Credit Card Reforms: Changes to the allocation of credit card repayments

Information verified correct on October 1st, 2016
credit card bill

Now, when you pay your credit card bill, the interest charges that cost you more will be paid first the and less expensive charges second.

Key points

  • If you are being charged for multiple transactions made on your credit card, the transaction that attracts the highest rate of interest will be paid off first.
  • You have the option of directing your repayments towards a particular transaction on your credit card.
  • This will only apply to credit contracts approved after the 1st of July.

The reform

It’s common knowledge that if you withdraw money from an ATM, you will be charged more than if you use your credit card to make a purchase. What’s not so widely known is that when you have multiple transactions on

Highlighted in yellow is the clause that outlines the allocation of repayments for the HSBC Visa Credit Card prior to the credit card reforms. Not so easy to find. Click to enlarge.

your card attracting different rates of interest like balance transfers, cash advances and purchases; your repayments are directed towards the low-interest charges first.
It works like this: The longer a charge is left on your card unpaid, the more time the interest has to accrue. Each month when you pay your credit card bill, your lender is putting your money towards transactions that have a low rate of interest (balance transfers, purchases and special promotions) while transactions like cash advances that attract higher interest charges are left till last.

This information is available within the credit card’s terms and conditions, but these booklets are designed not to be read, so it’s no surprise that this clause is often overlooked.

What’s changed?

Changes to the ‘National Consumer Credit Protection Amendment (Home Loans and Credit Cards) Bill 2011′, require that the part of the balance that has the highest annual percentage rate must be paid first, then the part of the balance that has the next highest and so on, until all interest charges are paid.

What does this mean for you?

Although this is part of the government’s fairer banking initiative, a ‘fair go’ will only be offered to people who apply and are approved for a credit card after the 1st of July. So, if you have an existing credit card, read on to see how much money switching to a new card may be able to save you.

We spoke to some of the users of our site and found out how the changes to the allocation of credit card repayments can save them money.

Michael, 25. NSW.

Commonwealth Bank Gold Awards Cards

Balance Transfer Rate5.99% p.a. for 5 months
Interest Rate on Purchases20.24% p.a.
Interest Rate on Cash Advances21.24% p.a.
Credit limit$10,000
Outstanding balance$8,000.
Minimum repayment$25 or 2%. Whichever is greater.
Cash advance rate debt$1,600.
Purchase rate debt$2,400.
Balance transfer rate debt$0.

Repayments:

The old

  • Under the old allocation of credit card repayments system, Michael would have paid a total of $6,143.76 in interest repayments over a period of 127 months before his debt was repaid making the minimum repayments only.

The new

  • Under the new allocation of payments system, Michael will have paid $5,440.13 in interest over a period of 119 months, only making the minimum repayments.
Changes to the allocation of payments to Michael’s credit card debt come to a saving of $703.63 in interest repayments and eight months off the time it would have taken Michael to pay off his card.

  • minimum repayments of $80 a month
  • annual fee has not been factored in
  • balance transfer promotional period finished

Erin, 30. NSW

Bankwest Zero MasterCard

Balance Transfer Rate2.99% p.a. for 9 months
Interest Rate on Purchases17.99% p.a.
Interest Rate on Cash Advances21.99% p.a.
Credit limit$3,000.
Outstanding balance$1,000.
Minimum repayment$20 or 2%. Whichever is greater.
Cash advance rate debt$100.
Purchase rate debt$900.
Balance transfer rate debt$0.

Repayments:

The old

  • Directing repayments towards the transactions that have the lowest interest rate first me will cost Erin $890.49 in interest repaid over 95 months.

The new

  • Directing repayments towards the transactions that have the highest interest rate first will cost Erin $862.02 in interest repaid over 94 months.

The changes to the allocation of interest repayments will save Erin a total of $28.47 in interest and it will take her one month less to pay off her credit card.

  • minimum repayments of $20 a month
  • annual fee has not be factored in
  • interest free promotion on purchases not included

John, 70. NSW

NAB Qantas Rewards Premium Credit Card

Balance Transfer Rate0% p.a. for 15 months with a one off 2% balance transfer fee
Interest Rate on Purchases19.99% p.a.
Interest Rate on Cash Advances21.74% p.a.
Credit limit$6,000
Outstanding balance$3,000.
minimum repayment2%
Cash advance rate debt$0.
Purchase rate debt$1,000.
Balance transfer rate debt$2,000.

Repayments:

For someone like John, who has outstanding charges on his credit card charged at the same rate of interest. Changes to the way payments are allocated to his credit card balance will make no difference to the amount of interest he has to pay and will not reduce the time it takes him to pay his debt.

  • minimum repayment $75
  • annual fee not factored in
  • promotional balance transfer rate has finished and is charged at the purchase rate of interest

Is it worth switching cards to take advantage of these regulations?

Who will see little or no change?

This change is going to have little impact for the people who carry a small balance like Erin, or only use their card for purchases and pay the entire balance off each month.

For cardholders like John, who has a balance transfer balance that has reverted to the standard purchase rate (some cards revert to cash advance rate) and a balance charged at the purchase rate of interest, changes to the allocation of repayments to his card will make no difference to his the total amount of interest he has to pay or the time it takes him to pay if off.

But cardholders who carry a credit card debt made up of balance transfers, purchases and cash advances are going to see a real saving.

Who will benefit the most?

As you can see from Michael’s example, the effects of the reform will be felt the most by people who have a balance with transactions charged at different rates of interest. Even though the difference in the Michaels card’s cash advance and purchase rate of interest is only 1%, applying payments to the cash advance rate first still results in a saving of approx. $700 and almost a year off the time it takes him to clear his debt. A 1% difference in the cash advance and purchase rates of interest is something that common with the market’s high-end cards, but for the low-rate and low-fee cards, the difference can be as a great as 10%.

To find out whether this reform will save you time and money, check your credit card statement and look for a discrepancy between the highest and lowest rates of interest. If you’re trying to repay a high rate of interest like a cash advance and a low rate of interest like a balance transfer at the same time, compare your options for a new card and switch for more control over the way you repay your credit card.

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Jacob Joseph

Jacob is a writer and video journalist with finder.com.au. Credit cards, personal loans and savings accounts are his bread and butter, and he likes nothing more helping people understand the sometimes overly complex world of personal finance.

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2 Responses to Credit Card Reforms: Changes to the allocation of credit card repayments

  1. Default Gravatar
    Frank | September 28, 2013

    The Citibank website still seems to contradict the changes made last year. Is this correct?

    • Staff
      Jacob | September 30, 2013

      Hi Frank.

      Thanks for your question.

      There is an exception when you have a revolving deferred interest promotion on your account. According to the Citibank website, ‘We are required to direct the amount of your payment in excess of your minimum amount due first to your next expiring deferred interest promotion, and then any remaining would be applied to your highest APR revolving balance.’ This may happen within a period of two to three months of when your low interest promotion expires.
      After this, your repayments will be applied to the revolving balance with the highest APR.

      I hope this helps.

Credit Cards Comparison

Rates last updated October 1st, 2016
Purchase rate (p.a.) Balance transfer rate (p.a.) Annual fee
Virgin Australia Velocity Flyer Card - Balance Transfer Offer
Enjoy a 0% p.a. balance transfer offer for 18 months and also earn 2 bonus Velocity Points in the first 3 months on everyday spend.
20.74% p.a. 0% p.a. for 18 months $64 p.a. annual fee for the first year ($129 p.a. thereafter) Go to site More info
ME Bank frank Credit Card
Enjoy a low and consistent interest rate on purchases and cash advances, combined with no annual fee.
11.99% p.a. $0 p.a. Go to site More info
St.George Vertigo Visa
Introductory offer of 0% p.a. for 18 months on balance transfers and 1% p.a. for 12 months on purchases, plus a low annual fee.
1% p.a. for 12 months (reverts to 13.24% p.a.) 0% p.a. for 18 months $55 p.a. Go to site More info
HSBC Platinum Credit Card
Receive a full annual fee refund and save $149 if you meet the $6,000 spend requirement. Enjoy a balance transfer offer and platinum card benefits such as complimentary insurances and concierge services.
19.99% p.a. 0% p.a. for 15 months $149 p.a. Go to site More info

* The credit card offers compared on this page are chosen from a range of credit cards CreditCardFinder.com.au has access to track details from and is not representative of all the products available in the market. Products are displayed in no particular order or ranking. The use of terms 'Best' and 'Top' are not product ratings and are subject to our disclaimer. You should consider seeking independent financial advice and consider your own personal financial circumstances when comparing cards.

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