Jaw-Dropping Payment Allocation Method
If you are like most people, people who have never bothered to flip the credit card statement over and read the fine print that details how truly unscrupulous credit card companies are, you're in for a real shock. A shock that I hope makes you mad enough to vow to never carry a balance on a credit card ever again.
Suppose you have a balance on your credit card that includes multiple rate sub-balances. These might include:
- Low rate sub-balances transferred from another card.
- Normal rate sub-balances consisting of purchases.
- High rate cash-advance sub-balances.
Now you would think that credit card companies would, at the very least, apply an applicable portion of each of your monthly payments to paying down all of your sub-balances at the same time. NOT!
If you make only the minimum monthly payment, the credit card company is free to apply your entire principal payment (what's left after subtracting finance charges) to the lowest rate sub-balance on your card -- regardless of your creditworthiness.
This means that if your balance includes a 0% sub-balance and a 24.9% sub-balance, the credit card company will apply your entire principal payment to paying down the 0% sub-balance.
As you will see by using the credit card finance charge calculator, this can add up to thousands of dollars of additional finances charges.
Now, if that doesn't make you mad enough to stop sending your potential future wealth to credit card companies, then I'm sorry, but your brain has been washed clean of its ability to tell right from wrong.
Credit Card Accountability, Responsibility and Disclosure "Act"
On February of 2010, a new law went into effect that requires credit card companies to apply amounts over and above the minimum payment to the highest interest rate sub-balance.
You know what that means don't you? Yep, the credit card company lobbyists that are being paid from the finance charges you are sending them were once again successful in getting Congress to bow down and kiss their feet.
If Congress were truly committed to making credit companies accountable and responsible, the law would have required the credit card companies to apply the entire principal payment amount to the highest rate balances, not just the amount over and above the minimum payment.
In other words, the Act was just an "act."