A recent inquiry by a reader about whether her minimum and extra payments on her credit card were being applied correctly led to a flurry of emails, phone calls and a good education on new credit-card laws designed to help consumers.
But while the bottom line is that her credit-card payments were being applied correctly, it led to a few interesting revelations. It also was a good example of how confusing credit-card statements can be.
The federal CARD Act, which went into effect in recent years, most noticeably has added a box on your credit-card statements. It shows how long it would take to pay off a debt if you pay only the minimum balance and how much extra you would be paying in interest. There are also a number of other good protections in the act (see accompanying story).
One of the requirements of the law is that any extra payments above a minimum balance due will be credited toward your highest interest-bearing balance. In the past, credit-card companies might have been crediting the extra money to lower interest-bearing balances.
The law does not require credit-card companies to use the minimum balance toward the higher interest-bearing balance.
So let’s take the case of the reader, Carolyn, of West Akron, who asked that I not use her last name since she is a senior citizen who lives alone.
Carolyn has a Discover card. Last fall, she took advantage of a zero-percent, 18-month, balance-transfer offer from Discover for $4,000. She also had a balance of about $500 on an interest-bearing line on that same card, paying 13.99 percent.
Carolyn uses her Discover card only for two of her more expensive monthly prescriptions because she gets them at Marc’s and that’s the only credit card accepted there.
After looking at her bill and calling Discover, Carolyn was trying to pay extra to chip away at her interest-bearing balance. But it looked as if perhaps Discover was not crediting her extra payments to the interest-bearing account. She was told that was “company policy.”
Carolyn remembered reading about the provision in the new CARD Act, which should have meant that her extra money did go to the interest-bearing account.
I called Consumers Union, the publisher of Consumer Reports, and Bill Hardekopf, chief executive officer of www.lowcards.com, a free resource website for comparing credit cards. Both confirmed any payments above the minimum must be applied toward the highest-interest bearing balance. What we didn’t know was whether there was some small print related to balance transfers.
Norma Garcia, senior attorney and manager of the financial services for Consumers Union, said there are some limited exceptions to the rules, including if the card is a deferred interest card and is in the last two billing cycles. Another exception is if the card is called a secured card and the customer requests it, the extra above the minimum can be applied to the secured balance.
Garcia said Carolyn’s situation brought up a good tip for all consumers: If you want to take full advantage of a balance transfer with zero percent interest for a certain amount of time, it’s best to transfer to a completely new card.
“I would not recommend combining a balance transfer with an account that already has a balance. It gets much too complicated,” she said. “Transfer it to a card that has no existing balance on it and don’t use it for purchases.”
That’s why Carolyn’s payments got complicated.
Carolyn’s February statement said she owed a minimum payment of $85. She sent in $200.
“I wanted to take a chunk at the interest-bearing line,” she said.
While her statements show the balance transfer and the interest-bearing line, there’s no clear accounting for the consumer on how the payments are actually made when there’s more than one balance. Carolyn was trying to do the math herself using some balances of the various accounts on the second page of her bill. But that turns out to be the daily average balance, according to Discover spokesman Matt Towson, and not the actual account balances.
Discover told Carolyn her minimum payment was going toward her balance transfer amount, which happened to be the one that was interest-free. When she pressed, she was told it went toward the higher interest amount, which is what got her concerned about the laws.
Towson apologized and said Carolyn must have been confused by what she was told by the customer service agent.
Towson went over Carolyn’s bills with me and assured me that her extra payments were, in fact, being credited to her interest-bearing line. I told Towson that it was very confusing to read the bill because the numbers he was sharing with me weren’t even on the bill.
The interesting part is that according to Towson and confirmed by Hardekopf, the CARD Act does not require credit-card companies to credit the minimum payment toward the highest-interest bearing balance. The act allows credit- card issuers to choose how to apply the minimum, Towson said.
Discover chooses to apply it to a customer’s largest balance, he said.
I told Towson that I understood they were allowed to do that, but it felt like it was against the spirit of the CARD law, which is to help consumers pay down their interest-bearing balances quicker.
Towson said the biggest benefit to consumers is to pay off more than the minimum each month.
Hardekopf said while Carolyn is still benefiting from the balance transfer and paying down her debt, her extra money isn’t working as hard because she has both the balance transfer line and the interest-bearing line.
Hardekopf stressed that the key to balance transfers is to make sure you pay off the balance before the promotional period is over “or else you’re going to get smacked with whatever that interest is” and how many months you’ve had the balance transfer.
While credit-card statements have gotten better with the CARD Act, they are still way too confusing for consumers, Hardekopf said.
“I’m in the industry, and gosh ... I have to re-read things several times to understand them.”
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com. Follow her on Twitter at www.twitter.com/blinfisher and see all her stories at www.ohio.com/betty.