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Here's a scenario. My credit card's balance transfer option allows the money to be deposited to my bank account. Let's say I owe $10k at 12% and borrow an additional $10k at 0. If I pay back $10k the next month, will they apply to it zero rate or the 12%?

I think I heard that, due to the CARD act, only the minimum payment may go toward the lowest APR, and that any additional payment must go toward the highest APR. Or, does the bank still have the right to apply the higher APR to any part of the balance at their own discretion?

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  • Yeah, I looked it up, but that was 7 years ago. So I am wondering if anything changed over the time. (Plus no one seemed really sure at the end.)
    – Dong
    Jul 17 at 10:44
  • The accepted answer there notes that most cards have a rule against using balance transfer checks to pay down the same card or another card with the same bank. So that seems like the obstacle for you, unless you clarify that yours doesn't have that rule.
    – nanoman
    Jul 17 at 11:31
  • Yeah, I read that, too. But in my case, it is not a personal check, but basically a cash to be electronically deposited to my account. So that money can be used to pay down the same card. The thing is they can make that kind of attempt meaningless by applying 0% first to any payment up to the first 10K.
    – Dong
    Jul 17 at 14:28
  • I don't think anything has changed in the last 7 years, however, I don't believe the answers in that other question are completely correct.
    – TTT
    Jul 17 at 17:20
  • (Or the currently selected answer here either.)
    – TTT
    Jul 17 at 17:20
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If I pay back $10k the next month, will they apply to it zero rate or the 12%?

Read your card agreement and the terms and conditions for the 0% offer. In most cases, it will clearly state that any payment will go towards the low interest rate part first. That's the very reason they give you free money: they hope that it results in more high interest rate payments.

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  • Care to explain why you think the provision of the CARD Act mentioned by OP and others doesn't apply?
    – nanoman
    Jul 17 at 21:43
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tl;dr: As long as you have enough available credit, if the "balance transfer" will pay you cash directly into a bank account, then you can do what you propose.

Details:

...I heard that, due to the CARD act, only the minimum payment may go toward the lowest APR, and that any additional payment must go toward the highest APR

That's correct. Prior to the Credit CARD Act in 2010, banks could apply extra principal however they wished, and typically they would apply it to the lowest interest first because it was more profitable for them to do so. Beginning in 2010 in the US, all consumer (personal) credit cards must apply additional principal payments to the highest interest first. The fact that the lower interest rate is a promotional rate isn't relevant. This is a good thing for consumers.

Nowadays, likely because of the CARD Act, most banks won't let you take cash for 0% to prevent what you propose; instead they force you to pay off some balance from another bank. However, if they do give you cash, I don't think they could stop you from replacing your 12% with 0%. Note you typically will have a fee of 2-5% up front as well.

Tip: If you succeed in converting the high interest to lower, consider dividing it up into equal payments so that it is fully paid off by the time the promo rate expires.

Note that the law does not apply to business credit cards; only consumer cards.

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Just yesterday my bank called me about CoViD relief, and I asked this very question.

They said my monthly statement minimum payment works against the lowest interest rate amount. However, any payments made in excess of that do indeed apply to the highest interest rate first.

Just as you said. And now I know why. (Boy does that sound like a Washington compromise or what?)

So I simply am changing strategy, to place all my new charges on that card. (Good for the bank). Those come in at the low interest rate, so my over-minimum payments I make to keep up with those will quickly wipe out my high rate.

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  • Of course, putting no new charges on the card and making the same payment would wipe out your high rate even faster.
    – Bobson
    Jul 19 at 5:30
  • @Bobson No it wouldn't. That would be worse. The new charges have to go somewhere. My way, putting them on the card gets double use of the money: both to pay for the new purchases and to make an excess-of-minimum-payment to the card, thus reducing the highest interest. (note that purchases tend to be lower interest; but even if they're the highest interest, this is no worse and still may yield rewards/points/etc.) Your way requires abandoning new purchases, i.e. austerity. Jul 19 at 16:59
  • I was thinking more in terms of paying cash for new purchases (or debit). That said, I suppose doing a slow refinance of your high-interest debt by paying it off while racking up lower-interest debt is a valid option. The details of which works out faster will probably depend on actual balances, interest rates, amount available to contribute, and (yes) how much flexibility there is in which purchases to make.
    – Bobson
    Jul 19 at 17:35

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