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.

Classic advice for handling any amount of debt — mortgages, credit cards, etc. — is to pay more each month than is actually required. For instance, if I had a monthly credit card bill of $100, but I had an outstanding balance of $10,000, with 10% interest, it would take me 213 months (or 17 years and 9 months to pay off that card). But if I could make payments of $200 each month, the length of time I’d be making payments drops to 65 months (or 5 years and 5 months), and if I could kick it up to $500, I would be out of debt in 22 months — less than 2 years. While the numbers for the credit card balance and payments are made up, the math isn’t. You can use BankRate’s credit card calculator to figure the numbers for your own situation.

A lot of people suggest handling a mortgage in exactly the same way. Any payment you make beyond your monthly required payment goes directly towards the principal amount of the mortgage — meaning that you’re not paying off extra interest, and will, in the long run, save you money.

But there are some drawbacks to prepaying a mortgage in this fashion, and even to paying off debt quickly, depending on your interest rates. There’s no question that you should at least make the minimum payments each month, but there may be ways to take better advantage of other money.

Do you have a 401(k)? Depending on the interest on your debt, you may actually come out ahead in the long run if you can invest your money in a retirement account. You’ll have to run the numbers for yourself, but if your employer matches the money you invest in your 401(k), there is almost no reason that should convince you to not invest up to the matching limit. While prepaying your mortgage can save you money on interest, your employer is essentially offering you free money that you cannot get any other way if one of your benefits is a 401(k) matching program! And who wants to turn down free money?

You might also decide against making extra payments on any debt if those extra payments could put you in danger of building up more debt. If you have no cushion of cash, no emergency savings, you can put yourself in danger of racking up more debt if something unexpected happens. Having the money to deal with emergencies should take precedence over paying off debt quickly. However, if you can place the money you were planning to direct towards your mortgage or credit cards into savings and build up a decent emergency fund, there is no reason that you can’t start up those extra payments after you’ve built up a healthy cushion.