The Credit Guy

What to do when CARD Act rules backfire on you


A reader with multiple low-rate promotional card balances has found that the new CARD Act is thwarting her attempt to pay down several balances

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Question for the expert

Dear Credit Guy,
I have a credit card with various promotional annual percentage rates (APRs) (from balance transfers). I owe $2,000 with an APR of 4.99 percent due by Jan 2012, and another (on the same card) for $2,000 with an APR of 3.99 percent due by May 2011. Because of the new law, only my minimum payment is going toward the lower APR and the rest toward the higher APR. Unfortunately, I want to pay off the lower APR (due date is earlier than the higher APR), but see no way to do this, unless I pay off the higher APR first. This is a unique situation where the new law is not helpful for me. Is there any way around this? Please help — Susan

Answer for the expert

Dear Susan,
You are correct that in your unique circumstance, the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) does not help you. However, for most consumers with multiple interest rates on one credit card, the fact that any payment amount in excess of the minimum payment must be applied to the highest interest rate is a good thing!

I am at a little bit of a disadvantage because I do not know if you could afford to pay off the higher rate balance, but at this point I am going to assume that it is not an option. Given that, you have a couple of choices for your predicament. First, if possible, you could transfer the higher rate balance to another credit card. You would need to keep in mind any transfer fees and the interest rate that you would be charged once the promotional rate ends. It is likely that transfer fees would be less than the accumulated interest charges for the months it would take you to pay the balance, but it won’t hurt to be sure.

Second, begin saving to pay off the balance of the lower rate balance when the interest rate goes up in May of 2011, which is seven months from now. Depending on your minimum payment amount it is likely that only $20-$40 per month is being applied to your lowest rate balance. That means you would need to save approximately $1,800 in seven months or $257 a month. If you need to lower the payment you are currently making to your credit card in order to save that amount, then go ahead and do so (keeping the payment above the minimum due). Once the interest rate moves to the non-promotional rate, you make the $1,800 payment, which  will be applied to the balance with the new rate as it will be higher than your other promotional rate of 4.99 percent.

Of course, the second option will only help you out if you can then afford to make the payments to pay off your other promotional rate balance before the interest rate goes up in January 2012. Should you be unable to pay the balance before the promotional rate ends, you could explore other promotional offers at that time, should one be available.

Take care of your credit!

See related: Credit card balance transfers: The landscape is changingBalance transfers 101, How the Credit Card Act will affect types of credit cards

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