8

I have a $80 minimum on my credit bill.
If I pay them $100, do the additional $20 go to the card's Principal or Interest?
If it goes to Interest, do I have to explicitly state that those $20 go to Principal?

14

If it is a credit card bill, the money goes towards your balance because on all of my cards, the interest for the month will show up as a line item that increases the balance. So all your payment goes towards the balance.

This is good because your interest is probably calculated daily, and any amount you can lower your balance will therefore lower the interest you have to pay.

Additionally, in the US the CARD act means that you payment must be applied to items with the highest interest rates first.

http://www.helpwithmybank.gov/faqs/credit_late_payment.html#drop11

http://www.creditcards.com/credit-card-news/law-bans-credit-card-payment-allocation-trickery-1282.php

10

The extra money will go toward principal (assuming you're paying on time and don't have late fees).

  • This is simply not true. While it varies between lenders, almost all will pay off interest first. – DJClayworth Nov 26 '10 at 14:42
  • 3
    If they're making the minimum payment, all of the interest for the current billing cycle has been paid. In that case (which is the questioner's case) the extra goes toward principal. – mbhunter Nov 27 '10 at 6:02
  • Not necessarily the case. Sometimes the minimum payment is less than the interest owing. Here is an example: creditcardreview.ca/… – DJClayworth Nov 29 '10 at 18:24
  • 1
    OK, from now on I'm prefacing everything generic I say with "in the US." Credit card companies in the US must disclose the payback time on each bill if only the minimum payments are met. "Until the sun burns out" is not a valid payback time option in this case. – mbhunter Nov 29 '10 at 20:43
  • 1
    @mbhunter - CARD requires just that - minimum payments must be more than accruing interest. OP is in Puerto Rico, which I believe is subject to the US banking laws. – JTP - Apologise to Monica Jan 18 '14 at 13:09
6

Usually payments are applied towards:

  • Fees
  • Interest
  • Principal
  • in that same order? – lamcro Nov 24 '10 at 18:47
  • Yes, I believe so. – mbhunter Nov 24 '10 at 20:45
  • Isn't this true for a loan and not a credit line? – MrChrister Nov 25 '10 at 5:34
  • 1
    A credit line may have different terms. You can get into trouble with this stuff when you have multiple promotional credit lines, as payments will apply towards the highest rate balances as well. – duffbeer703 Nov 25 '10 at 18:53
3

Yes, for a credit card, payments in excess of the minimum will go toward principal. This is not always the case with a mortgage, where prepayments of extra principal need to be explicitly stated.

1

The fine print of your credit card agreement will always tell you exactly in what order things are paid off. You should have a copy of the agreement, and it's easy to get one if you don't.

In most cases I believe the order is:

  1. Fees
  2. Interest
  3. Older purchases
  4. Recent purchases

This applies to your minimum payment as well as any excess - the minimum isn't a separate kind of payment, it's just the minimum you are allowed to make.

0

There are some loan types where your minimum payment may be less than the interest due in the current period; this is not true of credit cards in the US. Separately, if you have a minimum payment amount due of less than the interest due in the period, the net interest amount would just become principal anyway so differentiating it isn't meaningful.

With credit cards in the US, the general minimum calculation is 1% of the principal outstanding plus all interest accrued in the period plus any fees. Any overpayment is applied to the principal outstanding, because this is a revolving line of credit and unpaid interest or fees appear as a charge just like your coffee and also begin to accrue interest. The issue arises if you have multiple interest rates. Maybe you did a balance transfer at a discounted interest rate; does that balance get credited before the balance carried at the standard rate? You'll have to call your lender. While there is a regulation in place requiring payment to credit the highest rate balance first the banks still have latitude on how the payment is literally applied; explained below.

When there IS an amortization schedule, the issue is not "principal or interest" the issue is principle, or the next payment on the amortization schedule. If the monthly payment on your car loan is $200, but you send $250, the bank will use the additional $50 to credit the next payment due. When you get your statement next month (it's usually monthly) it will indicate an amount due of $150. When you've prepaid more than an entire payment, the next payment is just farther in to the future. You need to talk to your lender about "unscheduled" principal payments because the process will vary by lender and by specific loan.

Call your lender. You are a customer, you have a contract, they will explain this stuff to you. There is no harm that can possibly come from learning the nuances of your agreement with them.


Regarding the nuance to the payment regulation:

A federal credit card reform law enacted in May 2009 requires that credit card companies must apply your entire payment, minus the required minimum payment amount, to the highest interest rate balance on your card.

Some credit card issuers are aggressive here and apply the non-interest portion of the minimum payment to the lowest interest rate first. You'll need to call your bank and ask them.

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