Credit Card Payment Allocation: Legal Rights And Application

Credit card payments are applied according to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act). This law aims to prevent abusive lending practices within the credit card industry. It mandates that credit card issuers apply payments to the balance with the highest interest rate first and then to each successive balance with the next highest rate. This is known as the highest-APR-first rule. The Credit CARD Act also provides other protections for credit cardholders, such as advance notice of rate increases, limitations on fees and interest charges, and rules for handling payments. In addition, there are other regulations and standards that govern credit card processing, such as the Payment Card Industry Data Security Standard (PCI DSS) and the National Automated Clearinghouse Association (Nacha) rules.

Credit card payments and the law: minimum payments

Credit card minimum payments are the lowest amount that a cardholder is required to pay each month to maintain good standing with the credit card issuer. While it is not mandatory to pay off the entire balance, it is advisable to do so to avoid accruing interest charges. Making only the minimum payment can result in significantly higher interest charges and a longer time to pay off debt.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act) provides several protections for credit cardholders, including requirements for how minimum payments are applied. This law states that credit card issuers must allocate any payment above the minimum amount due to the highest-interest balances first. This is known as the "excess payment". The minimum payment itself can be applied to whichever balance the issuer chooses, often the lowest-interest balance.

The minimum payment on a credit card is usually calculated as a flat percentage of the total balance, although some credit card issuers may add new interest, fees, and/or past-due amounts to the minimum payment. Cardholders can find their minimum monthly payment on their paper or online statement, or by contacting the issuer directly.

It is important to make at least the minimum payment on a credit card each month to maintain good standing and avoid late fees, penalty APRs, and damage to one's credit score. However, whenever possible, it is recommended to pay more than the minimum to reduce interest charges and pay off the balance faster.

Imagine you have a credit card with the following balances:

• $640 of balance transfers at 0% APR
• $60 of cash advances at 25% APR
• $300 of purchases at 15% APR

Your minimum payment is $25, but you choose to pay $100. Here's how the issuer might allocate your payment:

• $25 (the minimum payment) goes towards the balance transfers, as they have the lowest APR
• $60 goes towards cash advances, which have the highest APR
• $15 goes towards purchases, which have the second-highest APR

Credit card payments and the law: excess payments

In the US, the Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the Credit CARD Act, is a law that aims to prevent abusive lending practices within the credit card industry. The Act has been in effect since 2010 and provides a variety of protections for credit cardholders and applicants.

One of the protections offered by the Credit CARD Act relates to the allocation of credit card payments. When a consumer makes a payment in excess of the required minimum periodic payment for a credit card account, the card issuer must allocate the excess amount first to the balance with the highest annual percentage rate (APR) and any remaining portion to the other balances in descending order based on the applicable APR. This is known as the "general rule".

The general rule applies to all credit card accounts under an open-end (not home-secured) consumer credit plan. It is important to note that the card issuer has the flexibility to determine the required minimum periodic payment and how that payment is allocated, as long as it is consistent with applicable laws and regulatory guidance.

There are special rules for certain situations, such as deferred interest programs or similar programs where the consumer is not obligated to pay interest if the balance is paid in full before a specified period. In these cases, the card issuer must allocate any excess payment first to the deferred interest balance during the last two billing cycles before the expiration of the specified period.

Additionally, if a consumer has asserted a claim or defense against the card issuer regarding a particular transaction, the card issuer must apply the payment in a way that avoids or minimizes any reduction in the amount subject to that claim, defense, or dispute.

Overall, the Credit CARD Act provides important protections for consumers by ensuring that their excess credit card payments are allocated to the highest-interest balances first, providing some relief from high-interest debt.

Credit card payments and the law: billing cycles

Billing cycles are an important aspect of credit card payments and can have a significant impact on your credit score. A billing cycle, or billing period, refers to the length of time between the last statement closing date and the next. This typically ranges from 28 to 31 days, but can vary depending on the card issuer and the number of days in a month. The Consumer Financial Protection Bureau ensures that billing cycles are as "equal" as possible, meaning that the number of days in a cycle should not vary by more than four days from a fixed day or date.

Your credit card billing cycle is crucial in understanding when your payments are due. According to the Credit Card Accountability Responsibility and Disclosure Act (also known as the Credit CARD Act), your payment due date must remain the same every billing cycle and must be at least 21 days after the end of the billing cycle. This grace period allows you to budget and make payments without incurring interest charges.

During a billing cycle, all your transactions, interest charges, and fees are tracked and reflected in your monthly statement. At the end of each billing cycle, you will receive a statement from your credit card company detailing the total amount you owe. It's important to make at least the minimum payment by the due date to avoid late fees and additional interest charges.

The Credit CARD Act also provides rules for handling payments. If you have multiple Annual Percentage Rates (APRs) applying to different types of debt, such as balance transfers and cash withdrawals, your credit card company must allocate any payments to the debt with the highest APR first. This ensures that payments are not applied to debts with lower APRs while higher APR debts continue to accrue interest.

Additionally, the Credit CARD Act prohibits double or two-cycle billing practices. Previously, some credit card companies calculated interest charges for a month by including the current balance and the average daily balance from the previous billing period, even if part of that balance was already paid. This practice is no longer allowed under the Act.

Understanding your billing cycle is crucial for maintaining good credit. It can help you make timely payments, avoid late fees, and manage your credit utilisation ratio, which is the amount of credit you're using compared to your credit limit. By staying informed about your billing cycle and making payments on time, you can effectively manage your credit card payments and improve your credit score.

Credit card payments and the law: payment allocation methods

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act) is a US law that came into effect in 2010. It aims to prevent abusive lending practices within the credit card industry and offers consumers protection in the areas of interest charges, credit card fees, and interest rate increases.

The Act stipulates that credit card issuers must apply any payments to debt in order of the highest annual percentage rate (APR) first. This means that payments above the minimum go towards the balance with the highest interest rate, then to the balance with the next highest interest rate, and so on, in descending order.

For example, if you have a credit card with the following balances:

• $500 cash advance at 20% APR
• $250 purchase balance at 18% APR
• $800 balance transfer at 2.99% APR

And you make a $700 payment:

• The $60 minimum payment would be applied to the $800 balance transfer, and the remaining amount would be applied to the highest rate balances.
• $500 would pay off the cash advance balance.
• The remaining $140 would be applied to the purchase balance.

There is no special payment allocation method for balances with the same interest rate. The card issuer can treat these as a single balance or separate balances.

An exception applies to balances with deferred interest, i.e. when interest is delayed and charged only if a balance remains at the end of the special financing period. In the last two billing cycles of the special financing period, extra payments must be applied to the deferred interest balance. This gives cardholders a chance to pay off their balance and avoid paying accrued interest.

Card issuers have some discretion in how they apply the minimum payment, which often goes towards the balance with the lowest interest rate. However, since there is no payment applied to the highest rate balance, the balance may actually increase after finance charges are added, making it more expensive to pay off in the long run. Therefore, it is in the cardholder's best interest to pay more than the minimum, so that most of their payment goes towards the highest interest rate balance.

In addition to the Credit CARD Act, there are other rules and laws that businesses must comply with when accepting credit card payments. These include the PCI Data Security Standard (PCI DSS), enforced by the PCI Security Standards Council, which is an independent body created by the major credit card companies. The Card Association Network, comprising Visa, Mastercard, Discover, and American Express, sets and manages interchange rates. The National Automated Clearinghouse Association (Nacha) governs ACH transactions.

Furthermore, the IRS requires businesses to report credit card payments, and Congress passed a law limiting the interchange rates charged by the Card Association Network. The Durbin Amendment, part of the Dodd-Frank Act, protects consumers by lowering interchange fees on debit card transactions.

While the Credit CARD Act provides several protections for consumers, it is important to note that credit card scams may ignore these rules or try to offer "better" options. As such, it is beneficial for cardholders to understand their rights and how the law protects them.

Credit card payments and the law: federal regulations

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act) is a federal law that came into effect in 2010. The Act created a new federal agency, the Consumer Financial Protection Bureau (CFPB), to administer the law's provisions. The CARD Act offers several protections for consumers, primarily in the areas of interest charges, credit card fees, and interest rate increases.

Interest Rate Increases

Under the Act, credit card issuers are not allowed to raise APRs on existing card balances within one year of an account being opened. There are, however, four exceptions to this rule:

• The bank disclosed they would raise the APR earlier when the account was opened
• The APR is increased due to a change beyond the issuer's control
• The customer fails to follow a "workout" arrangement with the issuer
• The cardholder fails to make the required minimum payments within 60 days

After the first year, credit card companies can raise APRs, but the increased APR will only apply to new transactions, and the new rate must have been previously disclosed to the consumer.

Notices and Disclosures

Credit card companies are required to give 45 days' notice of changes to the APR and 45 days' notice for any other significant changes to the terms and conditions of the credit card agreement. When consumers receive any notice of changes, they must be given 45 days to cancel the agreement without being deemed in default by the issuer. The credit card company cannot force consumers to pay off the entire balance upon cancellation.

Credit card statements must also show the monthly payment amount needed to pay off the existing balance in 36 months, including both payment and interest. Statements must also warn about the cost of making only the minimum required payment.

Rules for Late Payments

The CARD Act gives increased protections to consumers receiving monthly statements. Payments cannot be considered late unless the statement was mailed or delivered to the customer at least 21 days before the due date.

Rules for Handling Payments

Credit card companies must abide by certain rules for handling payments made on an account. If a consumer has multiple APRs applying to different types of debt, credit card companies must apply any payments to the debt with the highest APR first.

Double-Cycle Billing

Double-cycle billing is prohibited. This practice involves including the current balance on the credit card and the average daily balance from the previous billing period, regardless of whether some of the previous balance was paid.

Rules for Universal Default

The practice of creditors raising interest rates based on payment records with other creditors has been cut back or eliminated. Credit card companies can no longer raise interest rates on existing balances based on this. They can only raise the APR on future balances if they give 45 days' notice.

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