Credit CARD Act rewards faster balance pay off, credit scores

by Broderick Perkins
DeadlineNews.Com

(06/04/2010) Paying more than the minimum credit card balance is even more rewarding.

Under the new Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, when you pay more than the minimum, not only will you shrink your balance faster than ever, you could boost your credit score, thereby reducing future credit costs.

The Center for Responsible Lending (CRL) says a little-reported provision of the CARD Act focuses on how payments are applied to your credit card balance.

Personal finance experts advise credit card holders, ad nauseam, to pay more than the minimum payment because the minimum covers little more than the past month's interest charges. Paying more reduces the balance against which interest is levied.

Smaller balance, smaller interest charge.

In "Capitalizing on New Consumer Protections," CRL says many consumers are unaware a credit card can have several balances at different annual percentage rates (APRs) -- a promotional or "teaser" rate for initial purchases, a cash advance rate, and a rate for subsequent purchases.

Before CARD Act provisions took effect February 22, 2010, credit card issuers applied all payments to the lowest APR balances first, leaving you and higher APR balances hanging.

Since February 22, issuers can still apply minimum payments to the smaller APR balance, however, any payment over the minimum must go to the highest APR balance.

That's makes it more prudent than ever to pay more than the minimum amount, says CRL.

A CRL scenario involving a $10,000 credit card balance with two different interest rates makes the point.

In the scenario, before the CARD Act, a single $100 payment above the minimum saved $164 in interest charges. Now, after the CARD Act, the same single payment above the minimum saved $224.

"We want Americans to know that the new law's changes to credit card practices can work for them," says Joshua Frank, CRL's senior credit card industry researcher.

"We urge credit card customers to make the most of this new law by paying as much as possible above the minimum," he added.

CRL says in addition to the savings, paying more than the minimum can boost your credit score.

That's because the amount of debt relative to your credit limit comprises about 30 percent of your credit score.

Other factors come into play to affect your credit score, but generally, higher payments result in lower balances and a lower debt-to-credit ratio that tends to raise a credit score, both CRL and FICO, a leading credit scoring system designer, agree.

Conversely, a higher debt-to-credit ratio works to lower the credit score .

As your credit score increases, you are likely find that you pay less for other credit, CRL reports.

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