New Credit Card Law Bans Deceptive Allocation Practices

June 16, 2009

By Mike Wayman

The recession has American Citizens in an uproar and for good reason. As people throughout the country lose their homes to foreclosure and the unemployment rate continues to increase, watchdogs and legislators are on the lookout for companies, especially credit companies, who typically earn money from the misery of others.

When families fall behind in payments, often times, they engage in balance transfers on credit cards to avoid paying high interest payments or they simply acquire more credit cards to compensate for a lack of household income.

In the past, these strategies may have worked, however, sometimes at a very high cost. This is because credit card companies have had the power to “allocate” the payments made to the credit card company as it feels it should. What this means is that the credit cards you typically use have at least three different rates for the types of transactions we engage in: typical purchases, balance transfers and cash advances.

Allocation refers to the practice of the credit card issuer dividing your payments between these three types of “bills within bills” in your monthly statement. So, as an example, if the rate on a cash advance is 25%, purchases 9.9% and balance transfers 2.5% and you pay $100.00 as a payment, the credit card issuer controls how much of the payment goes to pay down the balance of each type of transaction. Guess what? They don’t allocate the payments in your best interest!

This new law bans the credit card companies from allocating the least amount of money going to the highest rate balance on the card. This is the most profitable form of keeping you in debt within the credit card industry.

If you find yourself in a situation where you need cash advances and balance transfers please read the credit card’s agreement that you signed to determine what the rates are. Call your issuer to ask if they are in full compliance with the new law enacted in May of 2009 that bans them from misappropriating your payments away from the highest interest rate due and by all means…avoid the cash advances if you can. These are the most expensive types of transactions you can make on a credit card.

From CreditCards.com:

Here’s an example of how the new law will work:

Say you have a $3,000 balance on your credit card and a $39 minimum payment. That balance includes $1,000 in purchases at a 12 percent interest rate, $1,000 in balance transfers at a 0 percent interest promotion rate and a $1,000 cash advance balance at an 18 percent rate.

If you make a $500 payment, the first $39 will most likely go toward the zero percent interest balance transfer, leaving that balance at $961.

The remaining $461 will go toward the $1,000 cash advance balance, leaving that balance at $539.
None of the payment will be applied to the purchase balance.

A Credit Repair Strategy that Works

June 15, 2009

By Mike Wayman

One of the credit repair strategies that works for consumers is to manage your debt ratios on consumer credit cards effectively. For example let’s say that consumer A has three credit cards with Chase, MBNA and Discover. Each have various balances and limits. For the purposes of illustration let’s assume consumer A has the following profile:

Chase card: balance $4374.00 limit: $6000.00
MBNA card: balance $2463.00 limit: $3000.00
Discover card: balance $3225.00 limit: $4500.00

Calculating the existing debt ratio on each card is simple: just divide the existing balance by the credit limit. The existing debt ratios on each of these cards is:

Chase card: balance $2374.00/limit: $6000.00 = 39.6%
MBNA card: balance $1463.00/limit: $3000.00 = 48.8%
Discover card: balance $2225.00/limit: $4500.00 = 49.4%

Maintaining a high ratio negatively affects your credit score. Typically, it is advised that your debt ratio on any given credit card stays lower than 25%. If you can afford to pay them down, do so. If not you still have a number of options at your disposal.

One option is to call your credit card issuer and ask them to increase your credit limits to make your ratios on your cards reach a limit that will improve your credit scores.

Another option at your disposal is to look for a new credit card that will give you a high enough limit to reduce your ratios so your score can benefit.

The recession has limited the practicality of this strategy as many credit issuers are scaling back on increasing credit limits. You can always inquire with your credit card issuer if they are offering credit limit increases before you ask for an increase in your limit.

With the credit markets drying up, seeking out trustworthy credit repair companies is a very good option that you still have at your disposal.