Customers Can Choose to Pay Loans in The Order They Choose

The CARD Act which was passed earlier this year changed the working of the credit card industry. Prior to the act credit card companies made up for low interest rates by charging customers with specific payments which cove their expenses. If consumers had a balance of $5000 with a 0% annual percentage rate for a year and if they had a $500, balance with 15% annual percentage rate, they would be forced to pay the $5000 before paying off the $500 which has a higher APR. “They would lock in your highest A.P.R. for the longest period they could,” said Odysseas Papadimitriou CEO of cardhub.com, a credit card comparison website.

A bill passed by Senator Christopher Dodd of the Senate Banking Committee said consumers had to pay their entire balance with the highest APR. After discussion the bill was changed to have credit card companies’ work the same way they would but the balance in payments were based on the lowest APR.

The legislation was finally released saying that payments beyond a certain limit will be charged with the highest APR. “Upon receipt of a payment from a cardholder, the card issuer shall apply amounts in excess of the minimum payment first to the card balance bearing the highest rate of interest, and then to each successive balance bearing the next highest rate of interest, until the payment is exhausted.”

The rule makes credit card companies force consumers to apply minimum payments to even low interest rates. Consumers who pay their minimum payment and more and even those who can only pay the minimum payment and no more, still struggle to repay their loans. Bank of America and Discovery said they are also following this process according to Bankoholic’s Jen Stryker. “Consumers are far better off than they used to be but still not as well off as if this minimum balance compromise hadn’t materialized,” said Norman Silber, a law professor at the Hofstra University School of Law and a consumer law expert, who answer questions on the topic in a recent Ask an Expert series. “I can’t think of a principled defense for allowing the minimum balance to be applied at the discretion of the card company.”

CardHub’s Papadimitriou encouraged consumers who can pay 15% of their loans to pay little more than 15% of their loans monthly in the order they choose and not by the credit card companies bidding. “Don’t mix and match. If you don’t have more than one type of balance on your credit card, you’re not affected by this.”