Two balance transfers means payment dilemma
2009 law created payment allocation rules, but they don't cover this
Let's Talk Credit
Dear Let's Talk Credit,
This concerns a major bank credit card. I wrote a balance
transfer check in June 2012. I then wrote another balance transfer check in
March 2013. The APR for both is 0 percent for the first 12 months. I calculated my
payments so I would pay off these balances before there would be any interest
charges, I thought. It turns out that the card issuer is distributing the
payments equally on both transfers. This means that my older transfer will not
be paid off before 12 months is up. Why can't the card issuer apply my payment
to the older balance that has the same APR? There was no balance on the card
before I did the transfers. I make monthly payments that are greater than the
minimum. Thank you. -- Gary
The Credit Card Accountability Responsibility and Disclosure Act of 2009 specifies how card issuers must apply payments made on their credit
card accounts. Unfortunately, no rule applies for how payments must be applied
for balances with the same interest rate.
The Act requires card issuers to apply payment amounts in
excess of the minimum amount due to the balance on the card with the highest
interest rate. For example, let's say you have a credit card with a 12 percent
interest rate for purchases, 0 percent interest for balance transfers and a
25 percent interest rate for cash advances. If you carry a balance on each of
those different categories, payments in excess of the minimum would be applied to the cash
advance balance until paid in full. Then payments more than the minimum due would
be applied to the next highest interest rate balance.
Before this new rule, card issuers typically applied payments
in excess of the minimum to the lowest interest rate balance. That meant
that if you were carrying a cash advance balance and a purchase balance on the
same card, the only way to significantly pay down the higher interest rate cash
advance balance was to pay the lower interest rate balance in full. The change
in how payments are applied is generally a good thing for consumers, since it more quickly pays off balances with high interest rates. However,
it doesn't help in cases such as yours where a 0 percent interest or low interest
offer has an expiration date and you have more than one balance on the card.
When your 0 percent interest rate expires on the balance
you incurred in June 2012, the interest rate will be higher than the other 0 percent interest balance on your card. At that point, your payments in
excess of the minimum due will be allocated to the higher interest rate
balance. I know the goal was to avoid any interest payments, but I hope you
can pay off the remaining balance quickly after the interest rate increases.
Your other option is to take advantage of the many 0 percent interest credit card offers on the market right now and open another
credit card with another issuer. If you feel comfortable opening another card,
you could transfer the amount owed on your first balance transfer before
the 0 percent offer expires. Do your research and find a card that has no
fees and read the fine print carefully. If you decide to take advantage of 0
percent balance transfers in the future, I recommend you keep only one balance
per card so you stay in control of how quickly the balance is paid off.
Let's keep talking!
See related: CARD Act bans payment allocation trickery
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Published: May 16, 2013