When you send off your monthly payment to the credit card company, it just gets applied to your debt, right? Some goes to paying interest, but it makes sense to think that credit card companies just automatically apply payments to your oldest debt.

That’s not how it works, though. Credit card companies are out to make a profit and they can make a lot more money if they handle your payments in other ways.

Your credit card provider does have to tell you about how they allocate payments, according to law. But most of us to examine all that paperwork that comes with a credit card as closely as we ought to. We really all ought to read the ‘payment allocation provision,’ though.

The Payment Allocation Provision

This provision tells you how your credit card company handles your payment, although it doesn’t necessarily go in to great detail. Look at Capital One’s payment allocation provision:

We may allocate payments and other credits and proceeds among the various segments of your account, and to charges and principal due within each segment, in any way we determine, including balances (including new transactions) with lower annual percentage rates (APRs) before balances with higher APRs.

Basically, the provision says that your credit card company is going to apply your payment however they wish. If, for instance, you owe money on your credit card that is accruing interest at different rates — maybe you are charged one rate for regular credit card transactions and another for cash advances — the credit card company can apply your payments to whichever portion of your debt they choose. It’s practically guaranteed that they’ll choose the portion with the lower interest rate for you to pay off first. After all, credit card companies make more money on debts with higher interest rates.

Your Options

Credit card companies have the legal right to chose how to allocate your payments. Most will continue to do so, no matter what you do. You shouldn’t just give in, though. You do have options.

You can call and ask your credit card company about their options. In general, they may not have many, but some companies allow you to mark your payments in such a way that they will be applied to the portion of your debt you prefer. This option is more common with student loans or car loans.

You can also transfer your debt to a 0 percent card. This option isn’t perfect, but can help as long as you are committed to paying off your credit card debt. Avoid making any other purchases on your 0 percent card, though: as soon as you do, you fall back into the same interest trap.

Beyond that, the best thing you can do is eliminate your credit card debt as soon as you can. It may seem impossible, but the faster you can reduce credit card debt the less interest you will wind up owing.

Just remember: credit card companies set their businesses up in their own favor. They like handing out credit cards — the more credit cards out there, the more money they make.

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