Payments Apply to Low APR Balances First

Many consumers may not know this, but when they accrue credit card debt, the payments they make go towards low APR balances before higher ones. This is called negative payment hierarchy.

In other words, if you use your credit card each month for standard purchase transactions, then at some point take a cash advance, if the standard APR on your credit card is lower than the cash advance APR (which it most likely will be), the payments will go towards your purchases first.

In simpler terms, this means that your higher APR balances get paid off last, and thus accrue the most amount of interest that you must pay back to the bank or creditor. So if you’ve got a credit card with 7.99% fixed APR, and you take a cash advance on that same card at 25.99% APR, any existing balance being paid off each month will apply to the purchases at 7.99%, not the much higher 25.99% APR on your cash advance.

And you’ll need to pay off the entire purchase balance before the payments will begin to go towards the cash advance balance. All that said, it’s best to avoid a cash advance for the simple fact that they carry fees such as 3% of the amount of each advance regardless of how quickly you pay it back.

If you need money, it’s best to do a credit card balance transfer, and move your credit card debt(s) to a 0% APR credit card so you can leverage your other assets in the short term. This allows you to make the minimum payment on your credit card without paying any interest, while freeing up extra money for any urgent expenses.

Related Topics:

1. If you Carry a Credit Card Balance, You Better Have 0% APR
2. Making More than the Minimum Payment on Your Credit Card
3. How Are Credit Card Minimum Payments Calculated?
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