Compliance Blog

Sometimes, credit union professionals are presented with the issue of allocating credit card payments to an account with more than one balance. Once you receive the minimum payment from your member, where does the money go or which balance on the credit card account must be paid first?

The choice may be more clear-cut than you anticipated. Below, this blog will discuss how credit card payments should be assigned to which balance, according to whether the member paid a minimum balance or paid a little more than the minimum payment.

Normal Minimum Payments 

According to this NAFCU Compliance Monitor article (member-only), credit unions are generally free to establish minimum payment requirements. “Credit unions are also generally free to determine how to allocate the minimum payment amount and this is also usually explained in the card agreement. For example, the minimum payment amount may be applied to the balance with the lowest annual percentage rate first, then to balances with higher rates.” You may want to consult your credit card agreement and competent local counsel to determine how your ability to allocate the minimum payment is affected. So, in practice, the credit union will apply the normal minimum payments according to the credit card agreement. 

 

Excess Payments- More than Minimum Payment 

Under Regulation Z, credit unions are required to process credit card payments when the member pays more than the minimum payment in a specific order when the credit card has different rates for various balances. For any excess payment paid to the credit union, §1026.53(a) requires credit unions to apply the payment to the balance on the account with the highest annual percentage rate (APR).

This caveat allows members to pay off their highest APR balances before paying down balances with a lower APR, yet it does not determine how the credit union applies the actual minimum payment to the account (contract). The credit union can choose to apply this amount to any of the balances on the credit card account, subject to the provisions of credit card agreement. 

The staff commentary addresses credit cards with the same rates and at least one different interest rate. The relevant part of the commentary states: 

 

“When the same annual percentage rate applies to more than one balance on an account and a different annual percentage rate applies to at least one other balance on that account, § 1026.53 generally does not require that any particular method be used when allocating among the balances with the same annual percentage rate. Under these circumstances, a card issuer may treat the balances with the same rate as a single balance or separate balances. See example in comment 53-5.iv.” (Emphasis added). 

 

The allocation rule for excess payment does not address the scenario where the interest rate is the same for all balances on the credit card. This scenario is likely addressed in the credit card agreement or possibly state law. Also, credit unions faced with this scenario may want to consult with local counsel to determine the best way to allocate credit card excess payments. 

The takeaway for allocation of credit card payments is to first be familiar with the credit card agreement.  The minimum payment is governed by the contract, but allocation of certain excess payments is governed by Regulation Z.

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