Credit Card Reform Makes It Easier To Pay Down Your Balance: Center For Responsible Lending

Jul 06, 2010 | Updated May 25, 2011

The credit card reform that took effect this year can save big money for cardholders who pay more than their minimum account balance -- as much as $2 for every $1 paid above the minimum, according to the Center for Responsible Lending.

That's all there is to it: Pay more than the minimum balance and potentially, you could save big because your payment will be applied to the debt with the highest interest rate instead of to the debt with the lowest interest rate. The new payment allocation order, along with an end to arbitrary rate hikes and an opt-in requirement for overdraft charges, was one of the central components of the Credit CARD Act, which Obama signed into law in 2009 and which took effect this year.

"The way payments are allocated now you can benefit -- but only if you pay more than minimum balance," said CRL researcher Joshua Frank. "If you pay the minimum payment, you don't get any benefit from the payment allocation now."

Paying more than the monthly minimum has been a good idea since forever, of course. But now it's an even better idea.

Frank said CRL analyzed several hypothetical credit-card debt scenarios for its analysis. A common scenario has a credit card holder with one balance for purchases and another for cash advances, which carry a higher interest rate. Because payment will now be applied to the more expensive debt, paying $100 above the monthly minimum saves this borrower $224 over the life of the loan.

CRL warns that consumers will have to be vigilant about these things, as credit card companies will find ways to fudge the law.

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Here are the Center for Responsible Lending's four tips for cardholders:

1. Pay above the minimum amount due! Paying more than the minimum can save you as much as $2 for every extra $1 you pay. For example, before the CARD Act, paying $100 extra could save you $164 in interest charges, but now that same payment amount can save you $224.

2. Continue to watch out for hair-trigger penalty rates. Issuers can still raise your interest rates on new balances for the slightest reason. It is particularly important to pay above the minimum if you get hit with a penalty rate. Doubling your payment could cut your interest charges over the following four years by more than half.

3. Don't opt in to over-the-limit coverage. Over-the-limit coverage is a bad deal because it means that if you go above your limit, the credit card company will extend you additional credit at an exorbitant cost automatically -- as much as 4,215% APR (annual percentage rate) - instead of rejecting your card. A better option would be to call your issuer to see if you can have your limit raised, or apply for additional credit elsewhere.

4. Avoid arbitration clauses in credit card contracts. Protect your rights. There are now more card options without arbitration clauses and you should ask your credit card company for one. Forced arbitration requires the borrower to resolve any dispute with an arbitrator, not in court. Research shows decisions in arbitration favor card issuers, rarely the wronged borrower.