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How are credit card payments applied?

When you pay a credit card bill, there are different ways in which your payments could be applied. If your credit card has more than one APR (Annual Percentage Rate), your payments may go towards either a balance with highest APR or lowest APR, depending on the amount of payment made and other variants.

Understanding how your payment allocation works when you make payments to your credit card could help you learn how to make adjustments to your payments, if needed, in order to bring your overall balance down.

What are the types of APR?

There are five types of APR that you may be applied on your credit card: 

Introductory APR: An introductory APR is a zero or low-interest rate in effect for a predetermined length of time, after you apply and are approved for a credit card. You can learn more about how long your introductory APR period is by reading your monthly statement.

Purchase APR: This type of APR will be applied when you make a purchase on your card and do not pay the full balance before your grace period (this is usually on or before your listed payment due date).

Cash Advance APR: When you make a cash withdrawal from your line of credit, a cash advance APR will be applied, usually immediately. This type of balance usually carries a higher APR than your purchase APR.

Balance Transfer APR: A balance transfer APR will be applied when you transfer a partial or full balance from another card.

Penalty APR: This type of APR is less common amongst credit card issuers, however, it is typically applied after consecutive late or missed payments or for payments made 60 days past their listed due date. In some cases, this higher APR may be applied to current and future balances. Because of the risk of damage to your credit score, in addition to a higher interest rate, it is strongly recommended that you make on-time payments to avoid this penalty.

How do payments work on a credit card?

Payments are applied to balances as they appear on your monthly statement before being applied to new transactions. When you make a transaction with your card, you may activate a purchase APR, but there are other types of APR, such as a penalty APR, balance transfer APR (when requesting a balance transfer) or a cash advance APR. Although you may see your overall balance on your monthly statement, you'll also find information about the APRs you currently have on your monthly statement.

What is the minimum payment?

A minimum payment is an amount you are required to pay each month by your due date in order to keep your account current. Making the minimum payment by your due date also helps you avoid any added late fees. Your minimum payment is typically between 1-5% of your current outstanding balance, and usually includes any fees and interest you may have accumulated. The specific methods your credit issuer uses to calculate your minimum payment will be outlined in your credit card's user agreement.

What if I pay more than my minimum balance?

The Credit CARD Act of 2009 stipulates that any excess payments you make (amounts higher than your minimum payment) should be credited towards the balance with the highest APR. If there is any amount leftover, this will be applied to the balance with the second highest rate of interest. You'll usually make more progress in bringing down your balance faster if you pay more than the minimum balance by your due date, especially if you are being charged interest.