What is Payment Allocation?
This section will be short and sweet. It will provide knowledge that will help anyone who is thinking of making that cash advance or balance transfer. The concept of payment allocation on a credit card is not a new one. However, it has many people wondering why certain balances on their credit card are not being cleared.
Jeff has a balance of $10,000.00 on his credit card for this month. From that, $9,000.00 is from general purchases he made. However, $1,000.00 is from a cash advance he needed because of an emergency. His payment due date rolls around and he decides to make a lesser payment this time because he does not have a full $10,000.00. The payment he decides to make is $1,000.00; thinking that he will be able to pay off the cash advance only. However, he quickly learns that this is not the case.
Why Isn’t This The Case?
The reason why the cash advance balance would not be paid off in full is that whenever a payment is made and there are multiple interest rate balances on the card; the bank’s systems will automatically split the payment in proportion to the balances.
For example, 90% of Jeff’s $10,000.00 is from purchases (19.99% interest rate) and 10% is cash advances (22.99% interest rate) which means of that $1,000.00 that was paid, 90% ($900.00) will go towards the purchases, leaving the remaining 10% ($100.00) to go towards the cash advances. This means that he will still have to pay that ongoing interest on the $900.00 cash advance after that $100.00 is applied to the balance.
This is definitely something to consider when taking a cash advance. This is another area of credit cards that is vastly overlooked by the mass. Our goal is to reduce the number of people who are not as informed as they should be!
Christopher is just a man on a mission to help those around him gain financial success. Obsessed with writing about all things finance, this GTA native is constantly learning and sharing his experiences with others.