Credit Card Payments Allocation Explained

Your credit card balance is not really one large credit card balance, especially if you have made different types of transactions, for example a combination of purchases, balances transfers, or cash advances. These balance sheets are actually separate and your monthly credit card payments could get distributed across the credits or applied to just one balance. So, you might think that you are transferring your balance transfer, but your payments are actually applied to your purchases balance.


Different interest rates

Different interest rates

You would have credit at different interest rates if you have made different types of transactions on your credit card, such as purchases, balance transfers and cash advances or an advance in cash equivalent. Your balance may also have different interest if you delinquent the penalty interest caused by more than 60 days on your payment. The interest will return to your current balance after six timely payments, but new purchases may still be charged the penalty interest.


Payments distributed

Payments distributed

If you have credits at different interest rates, you want to allocate your monthly credit card payments in full, or at least largely, towards the balance with the highest interest rate, for example a cash advance. That way you can get rid of the most expensive balance first. However, credit card issuers would prefer to first reduce the lowest interest rate balance so that they get exactly as much interest as possible over the higher rate balance.

Prior to the credit card Act in force in February 2010, credit card issuers could legally allocate payments at their discretion. They would often apply these payments to the balance with the lowest interest rate, which meant higher interest balance would slowly decrease and create more interest. As a result, many credit card holders were paying more interest, taking longer to pay off their balance sheets, and not receiving the benefit of a low interest promotion.


How Creditors Serve Split Payments

credit payment

Any credit card payment above the minimum must be applied to the credit with the highest interest. However, the minimum payment can (and typically) be applied to the balance sheet with the lowest interest rate, which usually includes credit balances at a promotional interest rate.

When you have credits at different interest rates, this you need to spend more than the minimum to reduce your higher rate balance. If you only pay the minimum, your higher balance rate cannot decrease at all. In fact, if financial charges are added, that particular balance sheet could rise.

Because the rule came into effect, more credit cards have the same interest for purchases and balance transfers. In this case, credit card issuers can apply the payments they choose.

The best way to avoid confusion of payment with how your credit card payment is awarded is by avoiding mixing balances with different interest rates on your credit card. Do not balance to credit cards that already have a purchases balance or make purchases on a credit card with a balance transfer. Also avoid taking an advance on a credit card that already has a balance or making purchases / transferring credit card balances with an advance in cash balance.