Making More than the Minimum Payment on Your Credit Card

When the new credit card rules go into effect on February 22 (Credit Card Bill of Rights), perhaps one of the most exciting changes will be the way payments are allocated.

In the past, credit card issuers applied payments over the minimum payment to balances with the lowest APR because it worked in their favor.

Let’s look at an example:

Total credit card balance: $5,000
Purchase balance: $3,000 @ 18% APR
Balance transfer balance: $1,500 @ 0% APR
Cash advance balance: $500 @ 20% APR

In the scenario above, credit card issuers would apply any extra payments to the balance transfer balance set at 0% APR.

That would leave the balances subject to the highest APR and associated finance charges intact, costing you more money.

It wouldn’t be until that $1,500 balance transfer balance was paid off before the purchase balance and finally the cash advance balance would be paid down.

The practice meant big money for credit card issuers, and never-ending debt for struggling card holders.

Fortunately, lawmakers said enough was enough, and stamped out the negative payment hierarchy.

Going forward, the reverse will be true when you make more than the minimum payment.

So in the above example, any extra payment(s) will attack the cash advance balance first because it has the highest APR, and thus the most finance charges.

The last balance to be paid down will be the balance transfer set at 0% APR, which benefits card holders because it’s not accruing any interest (at least during the promotional period).

The rule change is good news for card holders looking to pay down debt; of course, it should have always been this way, but better late than never.

Related Topics:

1. Payments Apply to Low APR Balances First
2. Watch Out for Negative Payment Hierarchy
3. How Are Credit Card Minimum Payments Calculated?
4. Which Credit Card to Pay Off First?
5. Credit Card Cash Advances