Beware, a Credit Card Payment Allocation Loophole May Cost You Money

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When it comes to choosing a credit card, consumers need to be shrewd. To expand on this idea, I think it’s also important that consumers are aware of the way their payments are allocated when they pay their credit card bill each month. Although the Credit CARD Act addressed many of the sneaky practices of credit card companies, it also created a loophole in the provisions for payment allocation that leaves consumers in the cold. Before the CARD Act, credit card companies almost always applied consumers’ credit card payments to the balance with the lowest APR first. This was advantageous for the credit card companies because it allowed them to assess the highest APR for the longest period of time, thus maximizing their profits from interest charges.

The CARD Act, effective February of this year, changed this practice and created rules around payment allocation that required credit card companies to apply consumers’ payments to the balance with highest APR first. The only problem: the rule only requires payments above the minimum to be applied to your highest APR balance.

According to a FINRA National Survey, 29 percent of consumers have only paid the minimum payment at some point in the last 12 months. With the way the CARD Act is written, this segment of consumers receives absolutely no benefit in terms of the way credit card companies allocate their payments. In addition, the language in the payment allocation provisions ensures that at least some portion of everyone’s payments is applied to their credit card balance in an unfair manner.

The Credit CARD Act in general has done a good job in making it difficult for credit card companies to engage in deceptive practices the way they did in the past. However, in this one instance, it has provided the opportunity for credit card companies to fall into old habits with the backing of the law.

Therefore, until the payment allocation rules get revised by either Congress or the Federal Reserve, it is important that consumers take precautions to protect themselves from the pitfalls of an unfair payment allocation system. In order to truly take advantage of the new rules, you need to pay well above the minimum payment on your credit card bill each month. Otherwise, credit card companies will be able to ‘trap’ your balance with the highest APR and charge you the most interest until you have been able to pay off all of your lower APR balances – just as they did before the CARD Act.

If you are not able to pay well above the minimum payment each month, it may be wise not to have a credit card at all. If you do, however, one strategy that some people use is to not mix and match transactions on any single credit card – meaning a separate credit card for balance transfers and a separate credit card for new purchases.

Here’s why: Let’s say you transfer a balance of $1,000 onto your credit card at 0 percent APR. Then let’s say you make $500 worth of purchases on the same credit card, but the new purchase APR is 15 percent. If you’re only paying the minimum payment (or close to it) you will not be able to pay off the $500 on which you’re being charged 15 percent interest until you have finished paying off the entire $1,000 in balance transfer debt on which you’re being charged no interest at all.

It is unfortunate, albeit not unusual, that a law meant to protect consumers contains compromises that do the opposite. Hopefully the Federal Reserve will address this problem in the near future, but until then it is important that consumers act as their own financial advocate and take precautions to avoid the adverse effects of these provisions.

This guest post is written by Odysseas Papadimitriou, CEO of, a marketplace for credit card offers.

Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Categories: Credit Cards

  • Mike Z

    Let’s say in the scenario above in which you have a $1,500 balance ($1k @ 0% and $500 @ 15%) and your minimum payment is $15/month…

    If you pay $15/month, then obviously it goes toward paying off the money in the 0% bucket.

    But what happens if you pay $16/month?
    A. Does that $16 go towards the 15% bucket? OR
    B. Is it split with $15 going towards the 0% bucket and only $1 going towards the 15% bucket?

    If option B is true, then can’t the credit card companies make matters even worse for consumersd by raising the minimum payment to say, $200/month and then adding a provision that says as long as $15/month minimum payment is met, they will not charge late fees or report your payment as late?

  • Khaleef @ KNS Financial

    @ Mike Z – option B is how the $16 payment would be applied. I’m not sure if various states have set a limit on minimum payments – they are usually between 2 & 4% of the outstanding balance (I would have to imagine that it’s regulated, but I don’t know for sure).

    I actually don’t have a problem with this “loophole”. It is no secret that paying only the minimum will hurt you in the long run – in fact part of the CARD Act makes the banks tell the consumer how painful it will be:

    I think that this just gives borrowers even more of a reason to pay more than the minimum payment!

  • Rt_ii

    What happens if you do make payments, say 20%-30% more than the minimum required? Is there someone that you can report this unfair payment allocation to?

  • kate

    Capital One has a deal where you can get a 0% transfer balance AND 0% interest on purchases for 12 months, plus 1.5 rewards points per dollar spent on anything, redeemable at any time. This means you can make a big fat payment on your Cap 1 card transfer balance, free up some space, charge something, and you will still be paying 0% interest, so no worry about what APR payments will be applied to. Personally, if you have to use a credit card, I think it’s a good deal. And no, I don’t work for them.