Credit card issuers are still playing "gotcha" with customers. Landmark reforms this year were intended to stop billing practices that gouge unwitting consumers. Yet banks are hanging onto a tactic that ensures borrowers rack up as much as possible in interest charges.
The practice in question comes into play whenever portions of a cardholder's balance carry different interest rates. Cash advances, for example, can come with dramatically higher interest rates than purchases. At Bank of America, it's about 24 percent for advances vs. a low of about 13 percent for purchases.
From the consumer's perspective, it makes more sense to pay down the higher interest rate balance first, because it rises at a faster pace.
Before the reforms went into effect, however, banks would apply any payments first to balances with the lowest rate. This ensured that the costlier balance kept fattening up for as long as possible.
The tactic was among those targeted by regulators. The new credit card law, which took effect in February, specifies that any payments above the minimum must first be applied to the balance with the higher interest rate.
The key phrase? "Above the minimum."
That means minimum payments can still be applied to the lower-rate balances.
And that's exactly what the biggest credit card issuers are doing, including American Express, Capital One and JPMorgan Chase. Customers can't request that a payment be applied any differently.
Although it's legal, the practice undermines the spirit of the credit card reforms, said Odysseas Papadimitriou, CEO of CardHub.com.
"Why should any part of a payment be applied in an unfair way, especially for people who can only afford to make the minimum payment?" Papadimitriou said.
The loophole was probably the result of regulatory compromise by lawmakers, said Ruth Susswein of Consumer Action. She said most customers don't realize that banks apply payments to their disadvantage and are infuriated when they find out.
Bank of America, the country's largest bank, noted that the policy is clearly stated in its cardholder agreements and did not provide further explanation. The Charlotte, N.C., company earlier this year touted a new effort to build customer trust with more transparent policies.
American Express spokeswoman Desiree Fish also noted that the policy is standard industry practice, and complies with the reforms.
Minimum payments are usually about 2 to 4 percent of the balance, or a flat dollar amount. At Discover, for example, it's 2 percent of the balance or $40, whichever is greater.
At Discover, the cardholder agreement states that any payments up to the minimum will be applied "at our discretion, including in a manner most favorable or convenient for us."
Spokesman Matt Townson confirmed that meant payments go to the lowest interest rate balances first.