Credit Card Bill of Rights Explained – Pt.2
The last time, we took a look at interest rates, how they can change now, and how the Credit Card Reform Act will make the rate changes a little, and only a little, more palatable. The points in the new law that we’ll look at today will greatly improve how your payments are allocated across multiple interest rates.
Here’s how they do it now. Suppose you have an outstanding balance of $2,500 on one of your cards. That $2500 may be billed at three different rates.
A promotional rate of 2.99% on $800 A cash advance rate of 27.99% on $700 A regular purchase rate on $1,000
Today, the bank will apply your payment toward the $800 at promotional rate at 2.99%. That way, the other two higher rates continue to accrue interest at the much higher rate as long as possible. None of those balances are paid off until the $800 balance is paid off. At the minimum payment, that can take years. Remember that they deduct their interest before applying the rest of your payment to that low interest balance.
After February, your payment must be either be allocated to the highest interest balance or prorated across the various interest rates. You can bet that the banks will choose the latter. I think the language should be clearer.
Speaking of interest rates, (and we were) did you know that “Zero Interest” promotional rates are not all they seem? It’s not really 0%. It’s deferred interest. It accrues but they don’t deduct it before applying your payments. There’s good news for us cardholders. That will end in February also. The “Zero Interest” promotions will probably go away but if they don’t, it will have to mean just that.
By the way, your bank is just as sleazy with your checking account if you overdraw. You can read about that in the article, Overdraft Scam?
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