Creditpedia: Payment Allocation
Ok, I have decided to start entries in the “Creditpedia” section. Since credit card companies frequently layer details and pricing into fine print and the terms and conditions, I will try and get to the basics of some of the practices that make them money and make you lose money.
Kids, today the word is Payment Allocation (well, words).
Payment Allocation is the generic term used to say that higher interest balance get paid off first.
What this means to you:
If you frequently carry a balance on your credit card and take balance transfer offers then you will be negatively impacted. For example, if you take on of those amazing introductory balance transfer offers of 0% for 12 months you will start getting incentives to spend on purchases or to use purchase checks. Don’t be tempted. The purchases you make will be at the regular APR. What does this mean?
Essentially, when you make your minimum payment all the payment will first go to any accrued finance charge (interest rate charges) while the remaining that go on to pay of principle balance will only pay off the 0% balance. All the purchases made on the 18% APR will not get paid off until after you pay off the 0% balances. Terrible right? Get used to it. Payment allocation is a very common practice smongst credit cad issuers. All the top issuers like Chase, Citi, Bank of America, Discover, and American Express apply this tactic.
Who does this benefit?
Nobody.
Tags: Creditpedia, Credit Card Issuers, Advice, Interest Rates, Credit Cards
[…] since you have essentially locked in a balance at the full rate while padding on purchases. Due to payment allocation, this transferred balance accruing high interest charges will stay until you are able to pay […]