MBNA's new 'fairer' policy masks hidden costs

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In January 2011, positive payment allocation - applying credit card payments so that a cardholder's most expensive debts are paid off first - will become mandatory.

As we reported a few months ago, however, eager beavers MBNA and Virgin Money couldn't wait until then and applied the new payment allocation policy in September.

But their benevolent gesture has also, perhaps unintentionally, offered an insight into how the positive payments rule will work in reality.

And it's not good news for consumers.

Introductory offers

The problem lies in how the company intends to allocate card holders' payments when there are two 0% introductory offers running at the same time - a somewhat regular occurrence in credit card land.

Understanding the terms
How payments are applied
When 0% periods end
More on 0% transfer deals here
And 0% purchases here

Say, for example, you sign up for the MBNA Platinum Plus credit card.

The card offers 0% on balance transfers for thirteen months and 0% on purchases for three months. If you immediately transferred a £300 balance to the card and also made a purchase of £300 then you'd have a three month period using two 0% deals simultaneously.

Under the new MBNA policy, any payments made during this period will not be allocated to the shortest 0% offer (as is currently the case).

According to an MBNA spokesperson, "on two 0% promotions that start at the same time we will allocate repayments to the balance that has the highest ultimate 'go to' rate".

In other words, the cardholder's payments will be used to pay off the transaction that will ultimately revert to the highest rate of interest.

Since balance transfers have a nominally higher interest rate than purchases, MBNA can therefore direct the cardholder's payments to the longer 0% offer.

So if the cardholder in the above example made three monthly payments of £100, they would discover that it was the balance transfer debt they were clearing when the 0% purchase offer ended. This would leave a £300 debt accruing interest at a high rate.

Not just standard 0% deals

In March 2011, we also learnt that the same minimum payments policy applied to a slightly different Virgin Money offer (MBNA run Virgin's credit card business).

The provider was offering a deal with two 0% purchases offers - one on purchases costing below £250 and one, three months longer, on purchases costing over £250.

Michael Overton, a Virgin customer, told us that Virgin were applying payments to the longest deal first.

Since the Virgin offer was linked to the purchase price, it meant that the only way customers could avoid interest was never to make a purchase of more than £250 on their credit card or to pay off the balance in full three months before the longer interest free offer ended.

"I find this terribly deceitful, even fraudulent and, more, totally unacceptable under today's circumstances," Mr Overton, told us.

After complaining, however, Mr Overton did have the interest applied to his account refunded and Virgin apologised for the misleading information he received about payment allocation.

However, as Mr Overton reflected after his brush with Virgin: "Just proves that one has to keep an eye on these folks!"

Potential benefits?

MBNA claim that the new policy will benefit consumers since it's reducing the most potentially expensive balances.

"Our aim is to stay true to the spirit of a high to low repayment order, by keeping payment allocation method simple and transparent whilst benefiting the most customers," a spokesman said.

However, it's hard not to see this as the latest in a long line of disingenuous money-making tactics.

While MBNA claim that "this [change] is in the interest of our customers", any MBNA card holder who has the means should make an effort to clear the whole debt before either of the 0% deals end.

In the meantime, anyone thinking about getting a new card should be aware that MBNA are responsible for issuing a number of non MBNA branded credit cards.

"We do have a wide range of products available to customers," the company admitted. "We would advise them [consumers] to ensure that they can choose a product that is most suited to the way they plan to use the card."

Current MBNA issued cards include the Virgin Money credit card, the AA credit card and cards issued by Cheshire Building Society, Virgin Atlantic and bmi, as well as their own branded cards.