Date issued: 20 Jan 2010

NATIONWIDE HOPES END OF CREDIT CARD REVIEW SIGNALS THE END OF NEGATIVE ALLOCATION OF PAYMENTS
Nationwide warns that US CARD Act does not go far enough

As the Credit and Store Card Review published by the Department of Business, Innovation and Skills (BIS) comes to an end, Nationwide Building Society reaffirms its view that credit cardholders’ repayments should be allocated to the most expensive debt first¹. The Society’s views are summarised below.

US CARD Act approach does not go far enough
The US CARD Act, favoured by some in the industry, only requires part of any repayment (the amount above the minimum payment) to be allocated to the most expensive debt first. Although this is a step in the right direction, it doesn’t go far enough for the consumer. This approach will particularly penalise the most vulnerable cardholders, who are only able to make the minimum payment and who may be more reliant on cash withdrawals, as their repayments could be allocated to the cheapest debt first (at the lenders’ discretion). The fairest option for consumers is for providers to always pay off the most expensive debt first¹.

0% Balance Transfer/Purchase deals are unlikely to disappear
Nationwide has offered a positive allocation of payments alongside promotional low cost introductory offers since its credit cards were launched in 1997. If Nationwide can do this, there is no reason why other credit card providers cannot do the same. More importantly, it is only with a positive allocation of payments that consumers can really benefit from interest free offers, as the higher interest rate debt is paid off first¹, allowing customers to benefit from introductory offers for longer. Under the current system credit card providers pay off the low rate offer first and, as a result, consumers can end up significantly worse off.

Removing the costs created by negative allocation of payments will enable customers to compare the true cost of each credit card.

Further transparency is not the answer
Nationwide has highlighted the issue of order of payments for some time and welcomed the regulation brought in by The Department for Business, Enterprise and Regulatory Reform (BERR) in October 2008, requiring all providers to highlight on customers’ statements how payments are allocated. Yet, the majority (63%) of credit cardholders still do not understand the order in which their repayments are allocated², compared to 69% in 2007³. Further transparency will not go far enough for the consumer. It is time the extra debt burden created by this practice was lifted from UK consumers.

Allocation of payments does not only affect a small number of consumers
Around 60% of credit and store card holders regularly pay off their balances in full each month⁴. Therefore around 40%, 14 million⁵, credit and store card customers do not pay their balance off in full and are potentially affected by the practice of allocation of payments. UK customers could save around £500 million⁶ in interest payments if other credit card providers adopted a positive allocation of payments in the way that Nationwide does.

In these difficult economic times, more and more people could find they are unable to clear debt and will be unaware of this practice as it’s never been an issue for them before. In addition, the Citizens Advice Bureau dealt with over 300,000 new enquiries about credit, store and charge card debts over the last year, making it the biggest issue they see⁷. With nearly all credit card providers allocating repayments to the cheapest debts first, many of their cardholders could be caught out by this practice.

Nationwide believes credit card providers should not be allowed to operate this unfair practice and make income in this way. The Society urges the industry to move quickly and change to allocating all of a repayment to the most expensive debt first¹, which could save individual customers up to £224⁸ in the first year. If not, then the Government should act now.

Nationwide’s product and marketing director, Chris Rhodes, said: “Nationwide has always operated an order of payments that works in the customers’ favour by paying off the most expensive debt first1, while still offering competitive features such as 0% interest on purchases and balance transfers. There is no reason why our competitors cannot do the same. It is not fair for providers to penalise those cardholders who are only able to make the minimum payments each month. The fairest option is for providers to use customers’ repayments to repay the most expensive debt first.”

MP and member of the Treasury Select Committee, Andy Love, said: “Consumers have the right to expect credit card providers to be clear and fair. Nationwide has shown that allocation of payments is not understood by consumers and cardholders continue to be caught out by this practice. A simpler, fairer system is needed. With more and more vulnerable people facing the challenges of debt management, now is the time to ensure this burden is lifted once and for all.”

-ends-

Notes to editors

¹ After fees, charges and interest.

² Research conducted among a nationally representative sample of 2,000 respondents online, by Marketing Sciences November 2009.

Nearly two-thirds (63%) of credit card customers still do not understand the order in which their repayments are allocated. Incorrect answers given were:

• The longest outstanding debt is paid off first (18%)
• Items with the highest interest are paid off first (8%)
• The most recent items are paid off first (4%)
• And many simply don’t know (33%)

Only 36% of credit card customers were aware that items with the lowest interest were paid off first.

³ Research conducted among a nationally representative sample of 1,000 respondents by phone, by Marketing Sciences June 2007.

⁴ Source: The Credit and Store Card Review – http://www.berr.gov.uk/consultations/page53299.html

⁵ 40% of 35 million active credit cardholders in the UK. Source: http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=470&a=17097

⁶ £500m is derived from the interest benefit to Nationwide credit cardholders by having a positive order of payments rather than a negative order of payments. This is based on measurements of the actual behaviour of cardholders who have more than one type of balance (purchases/balance transfer/cash withdrawal) and do not pay off their balance in full. The interest benefit to Nationwide credit cardholders has then been applied to the industry using BBA industry interest bearing balances data – data can be found at http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=470.

⁷ Source: http://www.citizensadvice.org.uk/index/pressoffice/press_index/press_20091027

⁸ Saving is based on a new Gold Card holder over 12 months, transferring £2,020 in month 1, making £307 of new purchases each month, withdrawing £84 in months 1 and 7, and making monthly repayments of £359 (with our positive order of payments compared to a negative order of payments). Breakdown of usage based on average Nationwide Gold Card active customer usage February 2008 – January 2009. The average £2,020 transfer is based on customers using this service.

For further information on order of payments please visit http://www.moneysupermarket.com/c/press-releases/credit-card-users-dont-understand-the-order-that-their-debt-is-paid-off/0006971/

A Gold Card is most likely to be suitable if aged 25 or over, have an annual income of £25,000 or more, and have an excellent credit history.

Nationwide Building Society won the award for most responsible credit card lending practices at the 2009 Card Awards on 5 February 2009.

Nationwide’s credit card includes the following features:

• 0% for 13 months on balance transfers**
• 0% for 3 months on purchases**
• typical 16.9% APR variable (Gold Card)
• Commission-free purchases abroad***
• FREE purchase cover for loss, theft or damage to most purchases over £50
• FREE 12 month extended warranty on many gas or electrical products
• Peace of mind for all cardholders with Nationwide Fraud Watch

** Introductory rates apply from the date the account is opened. Balance transfers at 0% must be made within 3 months from account opening and are subject to a fee of 3% (minimum £5.00).

*** We pass on a cost for transactions made in foreign currencies outside the Visa Europe region.