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.

So far, over 30,000 people have sent stories to the federal banking regulators who are working to reduce credit card abuses. The Consumer’s Union has a simple form to allow you to send your story to the Federal Reserve here. But you only have until August 4th — that’s Monday — to make sure your comments are heard.

The Federal Reserve already has some proposals that they’re considering to drastically cut the opportunities for credit card companies to abuses their customers: federal banking regulators want to stop credit card companies from raising interest rates on existing balances. They also want to stop the common practice of applying your monthly payment to the portion of your debt with the lowest interest rate, a technique that helps credit card companies make more money off the amount you owe. They are also looking at ways to prevent companies from sending bills that you literally cannot pay in time — you know, those frustrating bills that you get the day they’re due, or even after the due date. You can also comment on these proposals through the same form, and even make suggestions, if you would like to.

Personally, there is one credit card practice that I think absolutely needs to be prohibited: most credit card companies charge you a fee if you pay your bill online or by phone. Your payment is more likely to arrive late if you send it in by mail; there are just more opportunities for delays, human error and factors you can’t control. That means that credit card companies are more likely to get late fees if you mail a check than if you make a payment online. It seems like credit card companies are trying to set us up for failure. Unfortunately, the Federal Reserve isn’t currently considering making a change to the laws governing payment methods.

There are also a few other suggestions that consumer advocacy organizations, such as the Consumers’ Union, would like to see on the agenda, but aren’t there yet. If any sound like a good idea to you, you might consider submitting comments to that affect.

• Limiting high “penalty” rates, and how long a card issuer can keep you at those levels.
• End random changes in interest rates for future purchases “at any time for any reason.”
• End all retroactive interest rate hikes, even if there has been one payment that is 30 days late.
• Prohibit account-opening fees that are more than 10 percent of the
  credit limit, rather than the Fed’s proposed 50 percent. Multiple
  over-limit fees also should be banned during a single billing cycle.

Any comments that you submit will become part of the Federal public record, along with your name and contact information. That’s because the Federal Reserve is using these comments to guide public policy and must be transparent about their actions. However, if you are concerned about your name appearing on such government documents, you may chose not to share your comments and stories.

In the last year, it’s estimated that criminals were able to steal $3.2 billion through credit card fraud. Worse, the numbers of credit card frauds continue to rise. It’s beyond the point that cops are likely to be able to catch a crook if he commits that sort of crime. Hoping that you’ll get your money back if something happens shouldn’t be your only solution, though.

There are steps you can take to protect yourself from credit card fraud. It’s up to you, though — saying that you plan to start doing these things in the future isn’t going to stop a problem now.

1. Review your statement as soon as you get it. As soon as you spot your credit card bill in the mail (or online), open it and go over it. Look for any charges you don’t recognize.
2. Keep your receipts. You’ll want to double check your receipts each month against your credit card, to make sure that charges are correct. Don’t throw away your receipts — there are people with no compunction about rooting through your trash. Personally, I keep all my receipts at least until I finish my taxes for the year, just in case I can deduct something. But if you choose to get rid of your receipts sooner, you should at least shred them before throwing them out. You can get a decent shredder for under $40 at most office supply stores.
3. Shred credit card applications. You should be shredding any sensitive information before throwing it out — and credit card applications are definitely sensitive. It’s very easy for someone to complete one of those pre-approved applications in your name and rack up bills without your knowledge.
4. Shop online carefully. Not all websites are completely secure, so you should think about how reliable a site seems before you purchase through it. Big sites that are known to do lots of transactions are generally okay, but if a website looks like no one has ever bought through them before, be cautious.
5. Keep an eye on your card. When you use a credit card to pay for something, watch where it goes. It may not always be in your sight, but the more observant you are, the more likely you are to catch someone trying something with your card.
6. Carry only the cards you need. On any given day, do you really need to carry a stack of credit cards thick enough to play a round of poker? Odds are that you’ll only need one or two, so leave the rest of the cards at home. This goes double if you’re traveling — the more cards you carry, the more likely you’ll lose at least one.
7. Write down your numbers. If anything does happen to your cards, you’ll need the contact information on the back of your card, as well as your account number on the front. It’s kind of a Catch 22, but you can make the situation easier by already having a list of both numbers. Want to make it super easy? Photograph both sides of your card with a digital camera, and save the files somewhere safe.

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This weekend, the New York Times ran a series of articles on debt in America. It’s definitely worth reading, but if you don’t have the time to go through all of them, there are two paragraphs that I think are absolutely key:

Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.

Mortgage lenders similarly added or raised fees associated with borrowing to buy a home — like $75 e-mail charges, $100 document preparation costs and $70 courier fees — bringing the average to $700 a mortgage…

Credit card interest rates are on the rise, as well, even for those customers with good credit.

It costs money to buy on credit, whether you’re purchasing a new home or just putting a bag of groceries on your Visa. Credit is expensive, and while various lenders work on recovering from the credit crisis, it’s going to get even pricier. It’s important to remember that credit card companies don’t send you all those preapproved offers out of the kindness of their hearts. They’re marketing their businesses in order to make money — from you.

There is only one way to avoid paying fees and interest, and that’s to stop using credit. Personally, I’m not entirely there yet, and I still have some debt I need to pay off, but I’m working on it. I know it’s the only way to go.

Very few people are ready to go completely cold turkey on their credit cards — very few can truly afford it. But there are steps that you can take.

• Use only one line of credit. You’ll still have to make payments on your other cards and lines of credit, but if you’re only adding to what you owe with one card, you will have a better handle on what you spend.
• Pay cash wherever you can, especially for anything beyond the bare necessities. You have to buy groceries and pay rent, but for consumer purchases, using only cash can help teach you to save up for purchases. Even better, you don’t pay any fees or interest on cash purchases.
• Don’t open new lines of credit. For mortgages and other loans, a big chunk of the fees occur whenever you get a new loan or open a new account. The same is true for refinancing and other major changes to your account.

There are plenty of personal finance advisers out there recommending extreme solutions. If you can handle an extreme approach to paying down debt and getting away from needing credit, I’m all in favor of it. Most of us need slower and steadier methods, though. We all have to look at our own financial situations and chose the best path for ourselves.

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Get ready for yet another sign of the tough financial times. In an effort to cut the losses from charged off and delinquent credit accounts, credit card companies are starting to look at much more than your credit score and history, like your job and where you live. The new criteria go beyond whether you simply are approved or denied for a card. Existing customers are seeing their credit lines being drastically reduced without warning, some by as much as $50,000.

Where You Live
We know that banks are starting to use new and complicated application criteria to weed out potential ‘bad’ loan customers, and credit card companies are hot on their heels. Customers who live in areas hardest hit by the housing crisis, such as California, Nevada, and Florida will either be outright denied, or have a much lower credit line than people in neighboring states. Marketing campaigns in those areas and others have been limited, and automatic credit line increases have been halted.

What You Do
Your job may also determine your credit worthiness, and we’re not talking about how much you make a year. People with jobs in finance, construction, and even entertainment industries are being targeted as ‘high risk.’ Even those who have been faithful, paying customers for years suddenly are finding themselves curtailed. From The Wall Street Journal:

Peter Schiff, president of securities-brokerage firm Euro Pacific Capital in Darien, Conn., has been downbeat on the economy for months but never thought he was the kind of customer that AmEx would worry about. That changed a few months ago when one of his employees tried to book a block of hotel rooms for a seminar on the firm’s corporate AmEx card. The card was declined, and Mr. Schiff subsequently discovered that AmEx had cut his $40,000 credit line to $4,500.
(WSJ Online, by Robin Sidel, Monday, June 23, 2008)

Cardholders who find themselves with slashed credit lines are being asked for a lot more personal information than in the past. Small business owners in particular are being essentially audited to make sure of their solidarity. Credit card companies are hiring third parties to do their research work, finding trends, identifying risky customer groups, and conducting investigations on those ‘at risk’ cardholders.

This practice, while designed to minimize loss, may backfire. Many customers who find their credit lines cut or interest rates inflated are trying to contact their credit companies to either demand explanations, or to have their previous status re-instated. Almost all of them are finding those companies unyielding. Usually the customers will close the account and look elsewhere for the limits they had previously. An even worse scenario is one where a customers credit limit is cut or their interest rate is raised to the point where they will fall into default even quicker.

Each companies criteria for selecting customers is different, which is why it is possible for one company to deny a customer and another to approve them. The techniques for determining customer risk are usually a closely guarded industry secret. What most are saying is that FICO scores need to be higher, and that across the board banks and credit card companies are getting much more selective and conservative.

It seems like every day there’s another preapproved credit card waiting in my mail box. And some of those offers look pretty tempting — after all, who wouldn’t want a 0 percent interest rate if only for a few months. It doesn’t stop at the mail box, either — every store at the mall has it’s own credit card, offering a few extra coupons and special sales. It’s easy to pick up enough credit cards to play poker with.

Having so many cards can be a very bad thing, though. Even if you aren’t tempted to use them, there are reasons you need to cut that deck. Personally, I’m down to two cards and I plan to keep it that way. One is my great deal, cash back card that I rely on for most purchases and the other is my emergency card. A few more cards probably wouldn’t hurt me, but there are plenty of reasons to keep my wallet thin.

Most importantly, having a lot of available credit can actually be detrimental if you’re applying for a mortgage or other loan. Think of it this way: between 15 credit cards, you might have $15,000 worth of credit available beyond your current balances. If you apply for a mortgage the lender will want to know if you can pay off the mortgage even if you were to make $15,000 worth of purchases on those cards. The lender will assume that you have 15 cards because you’re planning to make purchases on all 15 of them. It’s a reasonable assumption, too — why bother to have so many different cards, otherwise?

Numerous credit cards can also open you up to a greater risk of identity theft. It’s simple math: the more places your personal information is floating around, the higher the odds that someone is going to take a look at it that shouldn’t. And if you have a record of taking out new credit cards, you may miss someone using your identity to do the same.

It’s easy to trip up with extra credit cards, too. The more cards you have, the more likely you are to miss a payment, even through plain old forgetfulness. It’s also easier to rack up debt, even if you’re trying to be responsible. If you don’t look at every statement every day — and honestly, who does? — it’s easy to forget that you charged a certain amount on a card and need to pay it off.

If your wallet needs to lose some of its credit card weight, get a copy of your credit report to help you decide which cards to cancel. You always want to keep your oldest account open — otherwise, your credit history can look shorter than it really is. Besides that oldest card, if there are any cards that you simply don’t use, I’d recommend canceling those first. From there, it’s simply a matter of checking which of your cards has the best interest rates combined with the best perks (cash back, for instance).

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