Only payments over the minimum go to high APR balancesNew credit card law doesn't apply when paying only the minimumBy Todd Ossenfort
Dear Credit Guy,
Example
scenario: You have a card with balances with two different interest rates. Say
you owe $53 interest on one portion of the balance and $27 on the other (total
of $80 interest). Your minimum payment is $200. Where does the other $120 go?
Is it distributed equally to each balance or proportionately, or does it all go
to the lowest interest rate and nothing to the higher one? I'm not asking about
paying over the minimum required ... I think I get that. I'm just not sure where
the rest of the minimum (minus the interest) is applied.
-- Melinda
Dear Melinda,
Just
to be sure we are all on the same page, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) requires that card issuers
apply payment amounts in excess of the minimum payment to the highest interest
rate balance. So, if your minimum payment is $200, and you make a payment of $300,
the $100 payment amount above the minimum would be applied to the balance with
the highest interest rate.
The
CARD Act has no such requirements of card issuers in regards to how they must
apply minimum payment amounts. The individual card issuer's policy on how that
money is applied when making only the minimum payment would be effective. You
can, however, still make use of one of the provisions of the CARD Act to learn
what your particular card issuer's policy is on applying minimum payments.
Card
issuers are now required by the CARD Act to place their cardholder agreements
online where they are easily accessible and in language that is clear and easy
to understand. In other words, you won't need to hire an attorney just to
understand their rules. You can find a copy for your card by
visiting the website of the bank that issued your card. For example, if you
have a Citi credit card, you would go to citicards.com and click on the card member
agreements at the bottom of the page. On the card member agreements page, you
would scroll until you find your particular card and then click on the
agreement for that card.
You
may also choose the call the 800 number on your credit card or statement, and
ask a customer representative your question about how your minimum payment is
applied. The representative answering the phone should be able to assist you.
From
my experience, most card issuers will apply your minimum payment to the lowest
interest rate balance -- that keeps you paying the highest rate longer, a situation good for the bank but not for you. If you want to pay down your highest rate balance,
you have options. The obvious option is to pay more than the
minimum balance due and any amount in excess of the minimum will be applied to
the highest rate balance. If paying more than the minimum due is not an option
for you right now, your second option is to transfer both balances from your
current card to another credit card where, once transferred, you would only
have the one balance. Before you make any transfers, always do the math (any balance transfer fees and new interest rate) and be sure you will be gaining from the
transfer and not losing.
Lastly,
if you are currently only able to make the minimum payment, I suggest that you
take a hard look at your spending and strive to make adjustments to increase
your payment amount. More importantly, if you are continuing to add to your
balances, stop now!
Take
care of your credit!
See related: Interactive guide to the Credit CARD Act, Credit card reform arrives in the form of the Credit CARD Act, Credit card agreements now all posted online -- find yours, Minimum payments mean maximum trouble with debt, New card statements elicit fear, spur action, An interactive look at your new credit card statement, Clarifying new rules for how card payments are applied to balances
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: May 10, 2010
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