Dear Liz: My wife and I are trying to pay off our credit card debt. We have several balances on one card with interest rates ranging from 3.99% to 27.99%. My understanding of the CARD Act was that after February 22, any credit card payments would be applied to the highest rate balance. However, I recently discovered our credit card issuer has been applying our minimum payment to the lowest rate first, before directing the rest toward the highest-rate balance. Does the CARD Act allow this or has the media been too careless in accurately describing the “highest interest rate first” portion of this law? Have credit card companies always applied monthly payments to the balance portion with lowest rate or was there always uniform distribution of the payment among all balance portions? If not, why did Congress ever draft the law to allow our issuer to do what they are doing to me and my wife?!
Answer: Before the Credit Card Accountability, Responsibility and Disclosure Act went into effect, many credit card issuers applied customers’ payments to the lowest-rate balances on their cards so that their highest-rate balances would continue to accrue interest longer. People who took advantage of low-rate balance transfer offers and then charged other purchases often discovered that their payments quickly paid off the 3.9% balance transfer offer, while their purchases continued to cost them 20% or more.
Early drafts of the CARD legislation would have required issuers to apply borrowers’ full payment to the highest-rate debt, but by the time the law was passed that language had been changed to say that any amounts above the minimum payment would be applied to the highest-rate balance. Issuers can apply the minimum to whatever balance they like, and many continue to apply it to the lowest-rate balance on a card.
If your balances are accruing different interest rates on the same card, you may be better off transferring the debt to other cards that each carry a single interest rate. That way, you’re the one deciding how your payments are allocated.