Legal Question in Business Law in California

Forced to accrue interest without ability to pay down.

I recently did a balance transfer on a credit card at a 3.9% fixed rate for the life of the loan. Afterward,I made a $25 purchase at the standard purchase rate of 14%. I then paid the minimum monthly payment thinking the payment would apply toward the $25 balance and the transferred balance.

Instead, the credit card company applied the payment toward the low rate balance entirely (the 3.9% balance), and did not apply any of the payment to the higher rate balance (the 14% balance). When I called them inquiring why the $25 charge was still a balance on my statement after 3 months that had accrued interest, they told me that payments received will not apply toward the higher rate balance unless the lower rate balance is paid off first.

So every month, payments are being applied to the low rate balance while the high rate balance freely accrues interest upon interest (compounded interest) without any payments being applied to lower it. Basically, I am forced to accrue compounded interest on the higher rate balance without any payments applied to it until the lower rate balance is first paid off entirely, and all payments received are applied to paying off the low rate balance.

Is this legal? Is this usury? This is not fair.

Asked on 2/03/06, 7:26 pm

2 Answers from Attorneys

Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Forced to accrue interest without ability to pay down.

Is it usury? No. Credit card companies operated by national banks are exempt. That's why their penalty rates can go as high as 29% or so.

Is it legal? Well, in the United States legal system, which is derived from English common law, there is a very general principle that parties who are competent to contract (over 18, sound mind, etc.) can agree to anything they want, so long as the subject-matter itself isn't illegal (gsmbling, prostitution, slavery, etc.).

There are a few exceptions based on public policy; for example, a landlord cannot enforce a lease provision whereby the tenant waives his right to sue the landlord for negligence for allowing unsafe conditions. There are many more examples of public-policy exceptions to the right to contract freely, but by and large they are very narrow in scope.

So, an agreement between a credit card company and a customer may, and generally does, state the sequence in which payments will be applied, and of course, the low-interest balances will always be reduced before the higher-rate loans are addressed.

This same practice, in a somewhat modified form, is found in many promissory notes, instalment contracts, and even mortgages, where the lender will specify the sequence in which payments will be applied.

In short, I don't think the practice is unlawful.

Now, another question is, how does your contract actually read? Have you read the agreement with the card company? Does it say this is what they will (or can) do?

You might have a case if the agreement doesn't specify, or allow, this practice. However, I'd wager it does.

Is it fair? I don't know; I'm a lawyer, not a philosopher.

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Answered on 2/04/06, 1:46 am
Michael Olden Law Offices of Michael A. Olden

Re: Forced to accrue interest without ability to pay down.

brian is a good lawyer and is not wrong -- his is not advice in this situation but information, not mis-information. this is now even more bleek since the bankrupcy laws have now changed to encompass more beneficial credit card laws whcih make it almost impossible to discharge debt in bankrupcy from credit caard debt -- the best advice don't buy anything on credit, pay off your bill completely each month, use cash only and don't buy anything you can't aford, save for the future and the preverbial rainy day -- if your parents didn't tell you but life is definitily not fair --- goood luck

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Answered on 2/04/06, 10:34 am

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