Bank Negara instructed credit card issuers to use payment received to settle highest interest rate item first. But...

Bank Negara has issued new guidelines to be implemented from 1 October 2011, requiring all credit card issuers to use payment received to settle highest interest rate item first.

Generally, Malaysian credit cards interest rates per annum of retail transaction range between 13.5% to 17.5%. Cash advanced rate can be as high as 18% per annum. Balance transfer rate ranges from 0% to 18% per annum. Interest rate of instalment payment plan also ranges from 0% to 18% per annum.

Let's say in a particular month, your credit card balance is as follow:

Retail transactions with interest @ 16% p.a. = 2000
Balance transfer instalment @ 0% p.a. = 500

If you pay 1000 for that month:

• In the worst case scenario, 500 of your payment is used to offset the balance transfer instalment, and only the remaining 500 be used to offset the retail transactions with 16% p.a. interest.
• In the best case scenario, 1000 of your payment is used to offset the retail expenses, and none will be used for balance transfer instalment.

However, the best case scenario for this month might not be good to the card holder, if the bank consider the balance transfer instalment be defaulted and charge a hefty 18% p.a. interest rate thereafter. The only way for the card holder to maintain the 0% balance transfer rate is to pay the monthly credit card charges in full until the balance transfer instalment is settled.

I believe Bank Negara should have think of this kind of scenario, and the guidelines should be comprehensive to ensure card holders are charged with the lowest possible interest charges for current and also subsequent months. Otherwise, scenario like the above might form a trap, causing the card holders end up need to pay even more interest.