Fred O. Williams is senior reporter for CreditCards.com. A business journalist since 1987, his work has appeared in Kiplinger’s Personal Finance magazine, the Buffalo News and USA Today.
How are payments allocated when a card payment and a purchase are made on the same day?
Under the Credit CARD Act, payments above the minimum are applied to the balance with the highest APR. So, a payment that comes in the same day as a purchase should be applied to the purchase, if the purchase balance has the highest interest rate.
“If a purchase and a payment are posted the same day, would the payment be applied before the purchase is posted?” a cardholder in Colorado asked.
The question was significant because the card also had a transfer balance at 0-percent APR. If the payment was applied to that balance, instead of the purchase, interest costs would build up.
How banks allocate credi card payments
Card agreements on file with the U.S. Consumer Financial Protection Bureau say that payments are applied on the day they are received, if they come in before the bank’s cutoff time.
This language from First Financial Bank USA based in South Dakota is a typical example:
“Payments received by 5:00 p.m. will be credited to your account as of the date of the receipt” if the payment is in order. After 5 p.m. (at the bank’s headquarters in the Central time zone) payments are credited the next calendar day.
Once the cycle closes, the “average daily balance” is calculated by dividing each daily balance by the number of days in the cycle. The average daily balance is the amount used to calculate interest charges.
If a purchase and equivalent payment both posted on the same day, the balance at the end of that day should be zero, meaning no interest charge.
Making a card payment and a purchase on the same day
Completing a card payment on the same day as a purchase requires planning, but it can be done.
- Digital payment systems are making it easier to complete speedy payments to your card.
- However, even a payment within a day or two of the purchase should result in minimal interest charges.
- A single day of interest on a $1,000 purchase, at the average 15.5 percent APR, is 43 cents. On a 2 percent rewards card, on the other hand, the $1,000 purchase generates $20.
Once the statement period closes, however, a minimum payment is calculated, making it more difficult to wipe out a purchase, if the card has more than one type of balance.
There can be several balances with different APRs on a single card in addition to the purchase balance, including:
- A transfer balance
- A cash advance balance
- A promotional deferred-interest balance
“Any payment received in excess of the minimum payment due will be allocated first to the balance bearing the highest annual percentage rate,” First Financial Bank USA’s card agreement states. But the minimum payment “will be allocated in the manner we determine.”
- That allocation rule reflects language in the regulation that implements the CARD Act, so it is common across consumer credit card contracts.
- In practice, this means the minimum payment is allocated to the lower-interest balance – such as a zero-percent transfer balance.
- In this case, in order to cancel out a purchase, the payment must equal the minimum payment plus the amount of the purchase.
The exception to the CARD Act’s allocation rule comes in the case of deferred interest promotions.
- During the final two months of the promotional period, payments over the minimum are allocated to the promotional balance, regardless of interest rates.
- This provision is designed to help pay off the promotional balance before the deferred interest becomes due.
Tip: Deferred interest deals – those “no-interest-for-X-months” promotions – can be appealing. But avoiding the interest is complicated. See “How to avoid big cost of deferred-interest financing deals” to learn more.