Credit CARD Act Loophole Could Keep You in Debt Longer
Written by Curtis Arnold
Posted On: June 4, 2010
When lawmakers first started talking about reforming the credit card industry, they targeted the practice of applying your payment to the portion of your balance with the lowest interest rate. While this habit helped subsidize some of the great zero-percent balance transfer offers from the past decade, it often led to a stubborn finance charge from a cash advance or a single purchase riding along in the high double digits.
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The buzz from Capitol Hill indicated that Congress intended to flip this around. Pay your credit card bill, lawmakers told us, and you'll knock out the sources of your highest finance charges first. However, as the Credit CARD Act made its way toward President Obama's desk, banks and politicians found middle ground. As the law stands now, only the amount you pay beyond your minimum payment must be applied toward the portion of your balance with the biggest interest rate. Otherwise, you'll just keep paying down your low-or-no interest rate charges.
Where Your Credit Card Payment Really Goes
The new rule splits the difference between banks' profit margins and the Beltway promises that make for great election ads. You can believe your incumbent this fall, when they tell you that their vote put a little more money in your pocket. But just a little.
Let's say you've got a typical balance of $5,000. Half of that was a balance transfer at 0%. The other half came from vacation expenses that will rack up 20%. You'd love to knock that higher rate balance down, but you'll need to use your extra cash to do it. Your minimum payment, probably $100, will go straight toward that no-interest portion of your bill. But if you can muster another $100, you'll bring both sides of your balance down.
Making just the minimum payment would end up costing you more than $500 per year for over two full years before you could even touch the 20% portion of your balance. The only way to fight this loophole is to get clever about making payments beyond the minimum and using low-interest balance transfers whenever possible. As banks recover, low rates have returned to the market. Common sense and competition can help you bring your accounts back into balance.
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).
3 Comments »
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June 10, 2010 at 6:24 pm
Shirley says:
Dear Curtis Arnold:
Your Credit card article is very interesting. I am in debt with two credit cards. I pay $5.00 over over my minimum. I know that this is not much. Right now my income is not all that much. My main interest now is making my house payment and my auto payment. One of my credit cards that I have is not all that great if you think Chase has a good credit card, guess again. My balance does not go down even if I could afford to pay them double each month it still wouldn't go down. The same with Citi Mortgage. I wish that I never had anything to do with them. But I do. If there is any advice that you can give me let me know. I do not have any money to give you, but what ever adv8ce you can give me probably would help. I will give you more information of my address and phone after I get an E-Mail from you.
Sincerely,
Shirley -
June 10, 2010 at 6:21 pm
Shirley says:
I sent you one reply and it said no comment. I guess you don't help anybody over the internet.
Thanks anyway,
Shirley -
June 9, 2010 at 11:34 pm
Huey Emmer says:
It seems to us just that the average citizen is simply no worse off as compared with the current US administration but yet the govt gets to carry out by different laws. The united states could handle their financial obligation by printing cash and their particular financial debt arrangement methods are supported by simply the most significant army on earth.
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