How Your Credit Card Payments Are Applied to Your Balances
Your credit card issuer applies your payment based on Federal law. Payments above the minimum are applied to the balance with the highest interest rate.
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If you have multiple balances on your credit card, your monthly payment could be split up between them. This could be true even if you're used to seeing just one balance on your credit card.
When Do You Have Multiple Balances?
You can use your credit card for different types of transactions: purchases, balance transfers, or to get cash from an ATM. Each of these balances can carry a different annual percentage rate, or APR. In addition, a portion of your balance may be under an introductory promotional APR or have the penalty APR for late payments applied.
You're probably used to seeing a single balance if you only check your credit card statement for your upcoming payment amount and due date. Reading through the entire statement, however, you'll notice a breakdown of each balance and the rate that applies to it.
Depending on the amount you pay, your credit card payment could apply to just one of these balances, or all of them. How your credit card issuer applies your payment is based on federal law.
Paying the Minimum
The minimum payment can be applied at the card issuer's discretion. Most card issuers apply the minimum payment to the balance with the lowest interest rate, including any past due amount or late payment fees. Refer to your credit card agreement to learn how your minimum payment is applied.
Since there's no payment applied to the highest rate balance, the balance may actually increase after finance charges are added. This makes it more expensive to pay off the balance in the long run.
Making Extra Payments
Any payment above the minimum must be applied to 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, let's say you have a credit card with a $60 minimum payment and the following balances:
- $500 cash advance at 20% APR
- $250 purchase balance at 18% APR
- $800 balance transfer at 2.99% APR
If you made 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's 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.
Handling a Deferred Interest Balance
An exception applies to balances with deferred interest—that is, when interest is delayed and charged only if you have a balance remaining at the end of the special financing period.
If one of your balances has a deferred interest promotion, you're allowed to request your card issuer to apply the extra payments to the deferred interest balance. Otherwise, the normal payment allocation rules apply.
In the last two billing cycles of the special financing period, extra payments must be applied to the deferred interest balance. This gives you a chance to pay off your balance and avoid paying accrued interest.
Paying Off Multiple Balances
It's in your best interest to have most of your payment go towards the highest interest rate balance. This allows you to save on interest by paying down expensive balances faster. However, you'll have to consistently pay more than the minimum to do this. If you can avoid mixing credit card balances, it's better managing your credit card and understanding how your payments will bring down your balance.
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LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.