Make us your home page
Instagram

Carry a balance on your credit card? Banks may be gaming your payments

NEW YORK

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.

fast facts

Hidden travel fees

Using a credit card on vacation abroad is convenient and rewarding, given cash back or airline miles. But a hidden cost lies in a markup of up to 10 percent on all transactions. The little-known cost is due to two things: foreign-transaction fees and dynamic currency conversion fees.

• A foreign-transaction fee is commonly assessed by credit card companies when Americans make purchases outside the United States: about 2 to 3 percent of the total.

• Dynamic currency conversion is a strategy that merchants use to make extra money on electronic transactions made by travelers. They offer to convert your transaction into your home currency but, in doing so, charge a fee as high as 7 percent of the purchase and pocket the difference. That can be easily avoided by simply insisting that your transactions are paid in the local currency.

TheStreet.com

Carry a balance on your credit card? Banks may be gaming your payments 05/22/10 [Last modified: Friday, May 21, 2010 6:14pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Airbag maker Takata bankruptcy filing expected in Japan, U.S.

    Corporate

    DETROIT — Japanese airbag maker Takata Corp. has filed for bankruptcy protection in Tokyo and the U.S., overwhelmed by lawsuits and recall costs related to its production of faulty air bag inflators.

  2. Federal agencies demand records from SeaWorld theme park

    Tourism

    ORLANDO — Two federal agencies are reportedly demanding financial records from SeaWorld.

    Killer whales Ikaika and Corky participate in behaviors commonly done in the wild during SeaWorld's Killer Whale educational presentation in this photo from Jan. 9. SeaWorld has been subpoenaed by two federal agencies for comments that executives and the company made in August 2014 about the impact from the "Blackfish" documentary. 
[Nelvin C. Cepeda/San Diego Union-Tribune/TNS]
  3. Legalized medical marijuana signed into law by Rick Scott

    State Roundup

    TALLAHASSEE — Gov. Rick Scott on Friday signed into law a broader medical marijuana system for the state, following through on a promise he made earlier this month.

    Gov. Rick Scott signed legislation on Friday that legalizes medical marijuana in Florida.
  4. Line of moms welcome Once Upon A Child to Carrollwood

    Business

    CARROLLWOOD — Strollers of all shapes and sizes are lined up in front of the store, and inside, there are racks of children's clothing in every color of the rainbow.

    At Once Upon A Child, you often as many baby strollers outside as you find baby furniture and accessories. It recently opened this location in Carrollwood. Photo by Danielle Hauser
  5. Pastries N Chaat brings North India cuisine to North Tampa

    Business

    TAMPA — Pastries N Chaat, a new restaurant offering Indian street food, opened this week near the University of South Florida.

    The menu at Pastries N Chaat includes a large variety of Biriyani, an entree owners say is beloved by millions. Photo courtesy of Pastries N Chaat.