How does my credit card payment get allocated?

If you have different types of credit card balances, you may also be subject to varying interest rates. In this case, you may be wondering how your card issuer allocates your monthly payment among those balances.

For instance, you could carry a purchase balance, a cash advance balance and another balance from a zero-percent or balance transfer offer. Of these, the cash advance balance will typically carry the highest interest rate. If you’re making more than the minimum payment towards those balances, then how do you know where each balance falls in the payment hierarchy?

Luckily, there are clear rules now on how your credit card payments are allocated. Here’s what you need to know about where your monthly credit card payments go.

How your monthly card payment is applied

Before Congress enacted the Credit CARD Act of 2009, there were no clear rules for how a card payment should be allocated. Card issuers could allocate them based on their own best interests, which often meant that cardholders paid more in interest.

When the Credit CARD Act went into effect, it specified how credit card lenders should allocate your monthly payments among different balances. According to the law:

• If you make only your minimum payment, the card issuer can allocate it to the balance with the lowest interest rate.
• If your payment is more than the minimum payment, the excess has to be allocated to the balance with the highest interest rate — for instance, a cash advance balance — and then to the one with the second highest interest, and so on in descending order, until the payment is exhausted.

That’s why it’s important to make more than the minimum payment on your credit cards, if possible, since more of it goes toward paying off your highest interest balance first. If there are multiple balances carrying the same interest rate, issuers will apply the payment in direct proportion to the balance amounts, without regard for when a promotional interest rate might end.

Exceptions to these guidelines

The CARD Act also states that you can ask your lender to allocate any amounts you pay in excess of your minimum monthly payment in an order that you specify.

However, special situations, like a deferred interest offer, might affect your payment allocation. Deferred interest allows you to avoid paying the interest that accrues on a purchase if you pay off your balance before the promotional period ends. You’ll typically see these offers with furniture and department store credit cards. If you don’t pay off the balance by the end of the promotion, the interest accrues on the total balance you started with — not just the remaining balance.

You may specify to your card lender that you’d like any payments above the minimum payment to go toward your deferred interest balance specifically. And for the last two billing cycles before your deferred interest promotion ends, the law requires the lender to apply any payments exceeding your minimum payment to your deferred interest balance.

The bottom line

When you carry multiple balances with different interest rates on your credit card, making the minimum payment may mean you’re paying towards the lowest interest rate balance first. That benefits your card issuer because you’re paying less towards the higher rate balances.

If you want to make more progress towards paying down your balance, make more than the minimum payment since the additional funds the law requires those payments above the minimum go toward the highest interest balance first. That’s why it’s a good idea to tackle your debt by paying as much as you can each month and not just your minimum payment.