Credit Card issuers who offer promotional rates must first apply the minimum payments to the balance of the higher interest rate

MURRAY FRANK LLP Investigates Claims against Credit Card issuers who offer promotional rates and fail to apply the minimum payments made by consumers to the balance of the higher interest rate.   

When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first. Common practice in the industry had been to apply all amounts over the minimum monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.

The new federal credit card reform law enacted in May 2009 requires that credit card companies must apply your entire payment, minus the required minimum payment amount, to the highest interest rate balance on your card. That requirement has been in effect since Feb. 22, 2010.

The purpose of the law was to ensure that, provided you pay more than the minimum payment, you'll be able to pay off your higher interest rate balances faster, lowering your interest payments and paying off your entire bill faster.  With this requirement your payment will first go to make your minimum payment. The credit card company can still decide what type of balance to apply your minimum payment toward, even if it is the lowest interest rate balance. But after that, the card company must apply your payments to the highest interest rate balance.

As an example:

•    You have a $3,000 balance on your credit card and a $39 minimum payment. That balance includes $1,000 in purchases at a 12 percent interest rate, $1,000 in balance transfers at a 0 percent interest promotion rate and a $1,000 cash advance balance at an 18 percent rate.
•    If you make a $500 payment, the first $39 will most likely go toward the zero percent interest balance transfer, leaving that balance at $961.
•    The remaining $461 will go toward the $1,000 cash advance balance, leaving that balance at $539.
•    None of the payment will be applied to the purchase balance. 

Therefore your highest interest balance has been significantly reduced, lowering your interest rate charges in the future and making it easier to pay off that balance sooner.

What some companies are doing is applying your payment to the previously mentioned balances like this:

•    The $500 payment would be applied to the $1,000 zero balance transfer.
•    The $1,000 cash advance balance would be untouched by your payment, as would the $1,000 purchase balance.  

If your credit card company is applying your payments as demonstrated above that balance will continue to accrue high interest rate charges in the future, and you must pay off not only your remaining balance transfer of $500 but also your purchase balance of $1,000 -- as well as any new balance transfers or purchases you put on your cards -- before you can even touch your cash advance balance, which has the highest interest rate.

If you have a credit card with a promotional rate and your credit card company has been applying your payments in violation of the law, and you wish to discuss this investigation or have any questions concerning this notice or your rights or interests with respect to these matters, please contact Lee Albert (800) 497-8076 or (212) 682-1818, or by email at [email protected].

Lee Albert
(800) 497-8076
(212) 682-1818
[email protected]