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You can’t always pay what you want

Fred Williams

The explanation of how your payment is handled sounds like the pinnacle of propriety.

“Any payment you make in excess of the required Total Minimum Payment will be allocated to your Account as required by applicable law,” says the clause in one typical store card agreement.

In fact, a lot of agreements say how they follow the law when it comes to allocating your payments if you have multiple balances on one account.

Those agreements leave out one important fact: The law often doesn’t specify how your payments should be recorded. In those cases, the card company can allocate your payment the way it likes, not the way you ask them to split it.

What’s that? You send them a check and ask them to put half the money on balance one and half on balance two, and they won’t do it?

Correct. They can disregard your instructions, as some hapless consumers have found out.

A little history should help understand how this works.

Before 2010, when the Credit CARD Act went into effect, card companies could apply your payments any way they liked. I remember trying to wipe out a cash advance I had foolishly taken out. I paid the full statement balance, thinking that would zero out the cash advance as well as my purchases for the month. But instead of allocating my payment to the cash advance, the issuer applied some of it to recent purchases that I made after the last statement closed. That way the high-rate advance stayed alive and kept generating interest.

The CARD Act stopped those shenanigans. It required that, when you pay more than the minimum payment, the extra money goes toward the balance with the highest interest rate. That stopped issuers from finding ways to keep your highest-rate balance lingering on, racking up interest charges.

The wrinkle comes in when you have a promotional rate balance, one of those “no interest for six months,” deals — or nine months, etc. Read the fine print and you’ll learn that it’s not really “no interest” — it’s deferred interest. Go one day over the period and “no interest” suddenly becomes quite a lot of money, when months of built-up interest is added to your balance. They’re counting on you to fail. So you have to be careful to pay off the purchase before time runs out.

If you have two deferred-interest balances on one card, you’ll almost certainly want to pay off the one that expires first. Regulators recognized this common-sense approach and gave card issuers explicit permission to earmark your payments the way you ask.

Permission isn’t compulsion. Since they aren’t required by law to allocate your payment the way you ask, issuers don’t have to listen to you.

At least some of them don’t, judging by complaints to the U.S. Consumer Financial Protection Bureau, and a quick poll of some of the major issuers. See my story, “How to avoid big costs of deferred-interest financing deals,” for details.

“The majority of the money is being applied to the balances with the furthest out end date,” one Wells Fargo cardholder with no-interest balances complained to the CFPB. “I was told they had no way of applying the excess money to any one balance. When I pointed out that that is what they were doing, only in their favor, not mine, I just kept being told he knew how frustrating that must be!”

It’s too bad card issuers still exploit loopholes to ding unwary customers with surprise costs. And it adds insult to injury when they hide behind a consumer protection law for anti-consumer practices. The Federal Reserve’s compliance manual for the CARD Act couldn’t be more clear. “During a deferred interest period, issuers are permitted (but not required) to allocate excess payments in the manner requested by the consumer.”

It will be interesting to see what the consumer protection bureau says about payment allocation when it publishes its biannual report on the CARD Act later this fall. But it shouldn’t take yet another rule to stop this gotcha tactic. All it should take is for card users to check out the company’s policy — and avoid the cards that are trying to trip them up.

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