Credit card payment allocation explained

Your debit card balance is not really just a great debit card balance, especially if you have made various types of transactions, such as any combination of purchases, balance transfers, or cash withdrawals. These scales are actually separate and your monthly payments with a debit card could get split among the balances or applied to just one balance. So you may think you are paying off your balance transfer, but your payments are actually being applied to your balance purchases.


Different interest rates

Different interest rates

You could have balances with different interest rates if you made different types of transactions on your debit card, such as purchases, balance transfers and cash withdrawals, or a cash loan equivalent. Your credit balances can also have different interest rates if the penalty rate triggered by more than 60 days being late on your payment. The interest rate will return to your existing balance normally after six timely payments, but new purchases can still charge the penalty interest.


Payments split between scales

Payments split between scales

If you have balances at different interest rates, your monthly debit card payments may be fully allocated, or at least largely towards the balance with the highest interest rate, eg an advance payment. This way you can get rid of the most expensive balance first. However, debit card companies would rather reduce the lowest interest balance first so that they get as much interest as possible on the higher balance rate.

Before the CARD Credit Act took effect in February 2010, issuers were able to legally allocate credit card payments at their own discretion. You would often apply these payments to the scales with the lowest interest rate, which meant higher interest rate balances would slowly decrease and more interest would arise. As a result, many credit card holders became more interested in paying, which took longer to pay off their balance sheets, and did not benefit from a low interest rate promotion.


Like creditors, payments should split

Like creditors, payments should split

Any debit card payment above the minimum should be applied with the highest interest rate balances. However, the minimum payment can be (and usually is) with the lowest interest rate applied to the balance, which will typically include balances at a promotional interest rate.

If you have balances at different interest rates, you will have to pay more than the minimum to reduce your higher balance rate. If you only pay the minimum, your higher balance rate could not decrease at all. In fact, if financing costs are added, this particular balance could increase.

As the rule has come into force, more debit cards have the same interest rate for purchases and balance transfers. In this case, debit card companies can apply payments as they choose.

The best way to avoid payment confusion with how your credit card payment is associated with avoiding mixed scales with different interest rates on your credit card. Do not transfer credit from credit cards that are already making a purchase balance or purchases on a credit card with a balance transfer. Similarly, avoid taking a cash advance on a credit card that already has a balance or transferring purchases / credit from credit cards with a cash advance balance.


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