A borrower who owes the same lender money under more than one credit agreement, or who has different balances on one credit card, may not know which debt a part-payment reduces. That can affect how much interest builds up and whether a particular agreement stays in arrears. The FCA’s Consumer Credit sourcebook sets rules on allocation for regulated agreements, and they apply across the UK to firms lending to consumers.
The right to choose between agreements
CONC 6.4.2R applies where a firm is entitled to payments from the same customer under two or more regulated agreements. If the customer makes a payment that is not enough to discharge the total then due under all of them, the firm must allow the customer to appropriate the sum paid towards any one agreement, or towards two or more in whatever proportions the customer thinks fit. The rule reflects section 81(1) of the Consumer Credit Act 1974. In practice this means a borrower with, for example, a short-term loan and a separate overdraft or card with the same firm can direct a payment where it helps most, if they say so when paying.
What happens if the customer gives no instruction
The default is not left to the lender’s discretion in every case. Under CONC 6.4.2R(2), if the customer does not appropriate the payment and one or more of the agreements is a hire-purchase or conditional sale agreement, a consumer hire agreement, or an agreement for which security is provided, the firm must appropriate the payment towards the sums due under the agreements in the proportions those sums bear to one another. That is what the rule says the firm must do, and the notes to the rule attribute it to section 81(2) of the Act. The position for other combinations of agreements is not set out in that rule, so the agreement terms and the customer’s instruction matter.
Different balances on one card: highest interest first
CONC 6.7.4R deals with a single credit card or store card that carries balances at different rates, such as purchases and cash withdrawals. A firm must first allocate a repayment to the debt subject to the highest rate of interest, then to the next highest, and so on. This applies to the outstanding balance on a credit card, the outstanding balance on a store card, and, where a card has a fixed-sum element or a fixed instalment plan, to repayments beyond those required to satisfy the fixed instalments. The rule benefits borrowers, because payments above the minimum reduce the most expensive debt first.
Fixed instalment plans
Some card agreements let customers move purchases or other transactions into a plan repayable in fixed instalments over a fixed period. CONC 6.7.4BR says a firm must not offer such a plan unless, acting reasonably, it has concluded that it is likely to be in the customer’s best interests and has taken reasonable steps to ensure the customer can make an informed decision. The guidance gives examples where it would not be reasonable to reach that conclusion, including where cash transactions carry a higher rate than other transactions and the customer has, or recently had, a significant cash balance that the plan leaves out, or where the customer is likely to be worse off with the plan. It also says reasonable steps include explaining clearly the features, costs and implications, and what happens, including any credit file reporting, if a plan payment is missed.
Minimum payments and paying more
Allocation matters most when a borrower pays little. CONC 6.7.5R requires a firm to set the minimum required repayment on a credit card or store card at no less than the interest, fees and charges applied to the account plus one percent of the amount outstanding, for agreements made on or after 1 April 2011. CONC 6.7.6R also requires the firm to offer customers the option, when making automated repayments, to pay any amount they choose that is at least the minimum but less than the full balance. The related persistent debt rules are in the guide to credit card persistent debt.
Practical steps
A borrower with several debts with one firm can say in writing which agreement a payment is for and keep a record of it. The overall priority between different creditors is a separate question, addressed in the guide to priority and non-priority debts. If payments seem to have been applied contrary to the rules, the lender can be asked to explain and the borrower can complain, as described in the guide to complaining to the Financial Ombudsman Service. Free advice is available to work out the best use of limited money, as covered in the guide to free debt advice.
FAQs
Can I choose which loan my payment goes towards?
Under CONC 6.4.2R(1), where a firm is owed payments under two or more regulated agreements and the payment is not enough to clear everything due, the customer may appropriate it to one agreement or split it between them.
Which card balance is paid off first?
CONC 6.7.4R requires the firm to allocate repayments first to the debt with the highest rate of interest, then the next highest, for credit card and store card balances.
Do these rules apply to every kind of loan?
CONC 6.4 applies to regulated agreements and consumer hiring, while the highest-rate rule in CONC 6.7.4R applies to credit cards and store cards.
The bottom line
Where a customer owes a firm money under several regulated agreements, CONC 6.4 lets the customer decide where a part-payment goes, and the firm must split it in proportion if the customer does not choose and certain agreement types are involved. On credit and store cards, CONC 6.7.4R requires repayments to go first to the highest-rate debt. Anyone unsure how payments were applied can ask the lender to explain. This is general information, not legal advice.