Oversight in Credit CARD Act could cost you money

The Credit CARD Act created a number of provisions meant to protect consumers.The Credit CARD Act, effective since Feb. 22 this year, created a number of provisions designed to protect consumers from the deceptive practices of credit card companies. However, there was one major loophole in the law’s stipulations for payment allocation that has left consumers with very little protection from an unfair payment system.

Changes in payment allocation from CARD Act

The CARD Act changed payment allocation rules by requiring that credit card companies apply consumers’ payments to the balance with the highest APR first, thereby paying down their most expensive debt as quickly as possible. However, in the final draft of the bill, the language was changed to say only payments above the minimum should be applied to the balance with the highest APR first. The minimum payment amount is still applied to the lowest APR first, which means extra costs for consumers and extra profits for credit card companies.

The Bill Was Changed Unfavorably In Committee

Senator Dodd introduced a bill on Feb. 11, 2009 (S.414) that proposed a payment allocation method that would apply the consumer’s entire payment to the balance with the highest APR first. However, during negotiations in the committee process, the committee reported an amended bill that changed the rule to only apply to payments above the minimum to the highest APR first.

How this affects consumers

The change in the language means a portion of everyone’s payments is allocated in an unfair manner. Even more troublesome, the 29 percent of Americans who can only afford to pay the minimum* have 100 percent of their payments allocated in a way that prevents them from paying down their most expensive debt. The people who need the most help are getting no benefit from the new rules meant to protect them.

How to avoid the pitfalls of payment allocation

Unless consumers are able to pay at least 15 percent of their credit card balance each month, they should only carry one type of balance on each credit card. Have a separate credit card for balance transfers and purchases – one credit card with a low interest rate on purchases and one with a low interest rate on balance transfers. Otherwise, just as in the old system, credit card companies will be able to delay consumers from paying down their credit card balances with the highest APRs.

* Source: FINRA National Survey – Financial Capability in the United States, December 2009

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