Credit Card Gist

Making the minimum monthly payments is not the best way of getting out of credit card debt. This much nearly everyone understands and agrees on. Exactly what effect paying only the required minimum each month has on reducing the debt burden, however, is much less well understood.

One CreditCards.cpm’s reader “thought that when you make a minimum payment, the first thing that gets paid is ALL interest accrued. Next, the balance that carries the lowest rate gets paid.” He discovered, however, that the reality was rather different. “What is happening to me is the interest accruing at the lowest rate is being paid off and the interest accruing at the highest rate is being added to the balance carrying the highest rate.”

It should be pointed out that the new CARD Act does not regulate the way the minimum monthly payment is applied to an account; it is spelled out in a cardholder’s agreement. What this means is that issuers are well within their rights to apply minimum payments however they see fit. As they will make more from letting the higher interest rate balance grow, it is clear what their choice would be.

Things change once you start making payments above the required minimum. One of the provisions of the new CARD Act mandates that any amount above the minimum due must be applied to the balance on the card with the highest interest rate. You would still need to do the math, however. As Todd Ossenfort, CreditCards.com’s credit expert points out, “to make any significant decrease in the balance you will need to pay at least the interest accrued on that balance for the month and as much more as you can afford.”

(Via CreditCards.com)

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