If a credit card offer looks too good, it usually is! The Credit CARD Act of 2009 went into full effect in February 2010, and it appeared that lawmakers were going to reign-in excessive finance charges. During Congressional debate, legislators looked at the high, double-digit rates that lenders applied to purchases and cash advances along with practices that applied over-the-minimum payments toward low-interest balances.
While consumers hoped that lawmakers would insist that credit card companies apply all payments toward balances accruing the highest-interest charges, the compromised legislation allows lenders to apply only payments above the minimum payment toward the highest-interest debts.
What does that mean if you have credit card debt at different interest rates on the same account, and you want to pay off the highest-interest balance first? Practically speaking, you’ll need to send in a payment that covers the minimum payment–which your credit card company will apply toward your low- or no-interest balances–and also add payment above and beyond that to pay down your high-interest balance.
For example, on an outstanding balance of $5,000, $2,000 of which is at a high interest rate and $3,000 of which is a zero-interest balance transfer, if your minimum payment is $100, you’d have to pay more than $100 to chip away at that $2,000 high-interest-rate balance. Feel the pain?
You can fight back by signing up for low-interest balance transfers when you can find them (the Act, in squeezing credit card companies’ profits, did reduce the availability of zero-percent balance transfer offers) and by investigating exactly where your payments over the minimum amont are applied by your lender. That means getting engaged in retiring debt and acting as your own advocate. A little homework can really pay off as we move into this new lending era. Keep yourself attuned to rates and make adjustments when they finally return to acceptable levels.