If you don’t pay off your entire credit card bill every month, you may be surprised to find out your payments may not be applied in the way you’d like (or even expect).

Your New Credit Card

Let’s pretend you recently received a new HSBC Low Rate Visa credit card. You have a hypothetical $5000 credit limit.

When you received your new Visa card, you transferred a $2000 balance from a previous credit card, and you’ve since charged another $1000 in purchases and taken a cash advance of $500.

The interest rates / annual percentage rates (APR) for each of those transactions are as follows:

•    2.99% on balance transfers
•    15.99% on purchases
•    19.99% on cash advances

Your Payment

You might logically think of the balance transfer as a longer-term debt to pay down (which may be why you transferred the balance to begin with), and the cash advance and purchases as something to pay off in full at the end of the month. On some level, that makes sense, right? Well, maybe not to your credit card company.

In this case let’s assume you make a $1500 payment at the end of your first billing cycle to pay off those purchases and cash advance, with the expectation of only paying the lower interest rate on your balance transfer after that point.

Where Your Money Goes

In reality, what’s likely to happen is that your credit card company will happily take that $1500 payment, but they won’t apply it to the portion of your outstanding balance that you want them to. Instead, they’ll apply it to charges with the lowest interest rate (in this case, your balance transfer).

Why do they do this? Obviously they earn more money when you have high interest charges in your balance. They want you to pay that 19.99% much more than they want your 2.99% in interest on the balance transfer.

The HSBC Visa Card terms and conditions (valid as of March 1, 2009) clearly state:

“We may allocate payments we receive from you to pay the total amount owing in any order we think fit.”

Vague perhaps, but you get the idea. Your payments may not be applied to the balances you were hoping to pay down. Other cards, like the Citibank Emirates Platinum credit card, make it even more clear that payments go to your balance transfer (the lowest interest rate balance) first.  If there was ever a good case for using separate credit cards for balance transfers and purchases / cash advances, this is it. Check your own card’s terms to find out how your credit card company will really apply your payments.