Dear Let's Talk Credit,
We just transferred a high-interest balance from one credit card to another credit card on which we were not carrying any balance, using a 0 percent interest offer they had. We planned it to the month to make sure the balance is paid by the end of the 0 percent offer in 18 months. Now we've just purchased an appliance and used the same card with the intention of paying it off immediately. Since the appliance just hit the card, how do we make sure the payment we're making goes to clear the appliance charge before they start charging interest on it and not the balance transfer? -- Mark
Zero percent interest offers are a great way to save money on interest charges and pay off debt more quickly. However, things can get a little complicated when the credit card used for a balance transfer is also used for purchases. Here's why:
The federal Credit Card Accountability Responsibility and Disclosure Act requires that card issuers allocate payments in excess of the minimum payment to the balance with the highest interest rate. The key phrase here is "in excess of the minimum payment due." In your case, the interest rate for purchases is higher than your 0 percent interest transfer balance. So your payment amount above the minimum due will be applied to the purchase balance. But, the minimum payment can be allocated as the card issuer wishes.
Here's the bottom line: To assure that your appliance purchase is paid in full and does not accrue any interest, you will need to make a payment that totals the amount of your purchase plus the minimum amount due. Use a minimum payment calculator to figure out what your minimum payment should be, and call your issuer to make sure you're doing the math right, because credit card minimum payment formulas vary.
It is encouraging that you have a plan to pay off your transferred balance before the 0 percent interest rate offer expires in 18 months. You have taken the vital step to successfully pay down your debt and that is to plan your spending so you know you can make the monthly payment necessary to reach your goal.
To avoid potential problems with repaying your debt within a specific time frame with a 0 percent interest credit card, I recommend that you refrain from using that card until the transferred balance is paid in full. With only one type of balance on the card, you will not have to worry about how your monthly payment is allocated. Your full payment will be applied as you want each month.
With that said, you may find you want or need to make another purchase with credit before your 0 percent interest balance is paid in full. If you do, keep in mind that when using this card for the purchase, you will need to make the minimum payment, plus the purchase price of the item, to avoid accruing interest at the purchase rate.
Let's keep talking!
See related: Survey of top credit card issuers' minimum payment policies
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