2.Allocation of Payments
Did you know that your credit card account likely has more than one interestrate? Your statement only shows one balance, but the credit card companiesdivide your balance into different types of charges, such as balance transfers, purchases and cash advances.Here's an example: They lure you with a zero or low percent balance transfer for several months. After you get comfortable with your card, you charge a purchase or two and make all your payments on time. However, purchases areassessed an 18 percent APR, so that portion of your balance is costing you themost -- and the credit card companies know it and are counting on it. So, whenyou send in your payment, theyapply all of your payment to the zeroor low percent portion of your balance and let the higher interest portion sit there untouched, rackingup interest charges until all of the balance transfer portion of the balance is paid off (and this could takea long time because balancetransfers are typically larger than purchases because theyconsist of multiple, previous purchases). Essentially, the credit card companieswere rigging their payment system to maximize its profits -- all at the expenseof your financial wellbeing.The new rules state that the amount paid above the minimum monthly paymentmust be distributed across the different portions of the balance, not just to thelowest interest portion. This reduces the amount of interest charges cardholders pay by reducing higher-interest portions sooner. It may also reduce the amountof time it takes to pay off balances.This rule will only affect cardholders who pay more than the minimum monthly payment. If you only make the minimum monthly payment, then you will stilllikely end up taking years, possibly decades, to pay off your balances. However,if you adopt a policy of always paying more than the minimum, then this newrule will directly benefit you. Of course, paying more than the minimum isalways a good idea, so don't wait until 2010 to start.
© 2009 National Financial Awareness Network, Inc.
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