How does my credit card payment get allocated?
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If you carry different types of credit card balances, which can carry varying interest rates, you may be wondering how your card issuer allocates your monthly payment between those balances.
For instance, you could carry a purchase balance, a cash advance balance and another balance from a balance transfer offer. Of these, the card advance balance will typically carry the highest interest rate. So it is in your interest to have your monthly payments go toward this balance, so you don’t incur higher interest rates for a longer period.
But that’s not always how card issuers determine where to direct your payments. Luckily, the rules of how payments are allocated have been largely standardized in recent years. Here’s what you need to know about where your monthly credit card payments go.
How your monthly card payment is applied
Before the Credit CARD Act of 2009 was enacted, there were no clear rules for how a card payment should be allocated. Card issuers could allocate them based on their own best interests.
When the Credit CARD Act went into effect, it specified how credit card lenders should allocate your monthly payments between different balances. The law says:
- If you make only your minimum payment, the card issuer can allocate it to the balance with the lowest interest rate.
- If your payment is more than the minimum payment, the excess has to be allocated to the balance with the highest interest rate — for instance, a cash advance balance — and then to the one with the second highest interest, and so on in descending order, until the payment is exhausted.
If there are multiple balances carrying the same interest rate, issuers will apply the payment in direct proportion to the balance amounts, without regard for when a promotional interest rate might end.
The CARD Act also states that you can ask your lender to allocate any amounts you pay in excess of your minimum monthly payment in an order which you specify.
Also keep in mind how a deferred interest offer might affect your payment. Deferred interest allows you to avoid paying the interest that accrues on a purchase if you pay off your balance before the promotional period ends. Furniture stores and department stores often extend these offers. If you don’t pay off the balance by the end of the promotion, you will have to pay all the accrued interest on your balance.
You may specify to your card lender that you would like any payments you make above the minimum payment to go toward your deferred interest balance. And for the last two billing cycles before your deferred interest promotion ends, the law requires the lender to apply any payments exceeding your minimum payment to your deferred interest balance.
The bottom line
When you carry multiple balances that bear different interest rates on your credit card, the card issuer may prefer your payments to pay off the lowest interest rate balance first, while it’s in your best interest to get rid of the balances you’re paying more interest on.
The CARD Act specifies that the card issuer must apply any payments in excess of your minimum payment to the balances that carry the highest interest rates, in descending order. However, if you make only the minimum payment due, the issuer can apply that to the lowest interest-bearing balances. That’s why it’s a good idea to knock off your debt by paying as much as you can each month, and not just make your minimum payment.