Dear
Debt Adviser,

I have a credit card with a large outstanding balance. Part of the balance is at a high interest rate, and the remainder is at a promotional rate. The credit card company is applying the entire payment against the promotional balance, which means my high-rate balance isn’t going down. Is this legal?

— Morley


Dear Morley,
I’m sorry to tell you that the answer to your question is almost certainly yes, it is legal. What you describe is the normal, everyday practice of the credit card industry: Payments are usually applied first to the balance with the lowest interest rate. What’s more, you agreed to it.

Before you get too offended, it’s not all your fault. There is very little financial education that happens in schools, and the quality of what we learn from our parents is often inadequate. Still, as an adult, you need to take responsibility for reading and understanding offers from strangers before you accept them.

Here are some things for all my readers, especially those who don’t think they need to read fine print or ask for directions, to keep in mind about credit cards:

  • Always read the
    fine print. The terms for the promotional and other rates contained in your credit card agreement may not be attractively displayed with eye-catching graphics, but they are there in all that dull and sometimes tiny print. These terms will state exactly how payments will be applied and to which rate, if applicable. The terms will also spell out how long promotional rates will last and any restrictions.
  • Make your payments on time, every time. One late payment can and probably will cancel any promotional rates and may even raise your regular rate to the penalty rate. The large credit card companies, such as Bank of America and Citibank, currently charge a 31 percent penalty rate, and on top of that, you will be charged a late fee. The large credit card companies today charge a late fee of $35 to $39.
  • Have a plan for when the special rate ends, before it happens. If you know that you will be unable to pay off your balance by the end of the promotional period,
    figure out a way to pay off the debt as soon as possible to avoid the higher interest charges. Hoping another promotional deal will come along is not a plan.
  • Be aware of what moving balances from one card to a new card can do to your credit if you don’t do it right. Taking advantage of a new low rate by opening a new card account will lower your credit score. Also if the balance moved is over 50 percent of the card’s limit, you will be dinged by the credit scorers a second time. And lastly, if you close your old account and it is an account with a long track record, you’ll take a third hit, because old credit is the best credit to the credit scoring models. You can use Bankrate’s
    FICO Score Estimator for a free look at how these changes would affect your score.

To get off the debt roller coaster, I suggest that you take stock of your finances and figure out a way to whittle down that large balance rather than move it around like a pea in shell game. Your first step is to stop charging now. Begin tracking your expenses, cut nonessential items from your budget and start using smart shopping strategies.

The holidays are coming fast, and I don’t want you to add to your debt load. Make a list, use cash, tell anyone on your list that you are giving and would like to get only one gift this year, consider a gift of time for baby-sitting or cooking or cleaning instead of a purchased one. My column ”
10 questions for holiday shoppers” has tips for making the holidays merry without debt.

If you are charging because that is the only way you can meet your monthly obligations, you may have a more serious problem and may want to contact a certified consumer credit counselor.

Good luck!

P.S. LMK wrote me regarding “Reducing damage from unpaid credit card debt,” that the column struck a sexist note when I told Stephanie she had a “sweet” name. After review, I believe LMK may have a point. Times do change! Thanks for the observation.

Steve

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of
Credit Repair Kit for Dummies. Visit
MMI for additional
debt advice or
click here to ask a debt question.