Credit Card Reform Law Makes It Easier to Pay Off Credit Card Balances

(May 25) -- Paying more than the minimum amount on your credit card balance has always been a prudent way to reduce account balances faster and save money. New federal regulations make that tactic even more rewarding.

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

Personal finance experts constantly advise credit card holders to pay more than the minimum due 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.

The Center for Responsible Lending (CRL) says a little-known provision of the CARD Act focuses on how payments are applied to your credit card balance. In its report "Capitalizing on New Consumer Protections," the 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 in February, credit card issuers applied all payments to the lowest APR balances first, leaving you and higher APR balances hanging.

Since Feb. 22, issuers can still apply minimum payments to the smaller APR balance, but any payment over the minimum must go to the highest APR balance. That's makes it more advantageous than ever to pay more than the minimum amount, says the 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, the 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."

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 makes up 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 the CRL and FICO, a leading credit scoring system designer, agree. And as your credit score increases, you're likely to find that you pay less for other credit, CRL reports.