Opening paragraph
Payment allocation rules determine which balances shrink first when you make a payment. That distribution matters because paying the wrong balance first — for example, a low‑interest installment loan instead of a high‑interest credit card — can increase total interest paid and prolong repayment.

How payment allocation rules work

  • Within a single credit card account that has multiple APRs (purchases, cash advances, promotional rates), federal law requires card issuers to apply any amount you pay above the required minimum to the balance with the highest interest rate first (see FTC guidance on payment application). For details, see the FTC’s explanation: https://www.ftc.gov.
  • Between different accounts (a credit card and a personal loan at the same bank), allocation follows your contract and the lender’s posted policy. Some institutions apply payments to loan accounts first unless you instruct otherwise.
  • Minimum payments typically go to fees, interest, and then principal in the order the issuer specifies, which often means principal on high‑interest portions gets reduced slowly.

Why this matters for credit cards vs loans

  • Credit cards often carry variable, higher APRs and compound interest daily. If payments are allocated away from that high‑interest balance, interest compounds and your payoff timeline lengthens.
  • Installment loans (personal, auto, student) generally have fixed amortization schedules and lower APRs; paying them down first can reduce outstanding principal but may cost you more in interest overall if it leaves credit card balances untouched.

Real example (simplified)
Imagine two debts: $10,000 credit card at 19% APR and a $5,000 personal loan at 5% APR. With $500 monthly available, applying extra payments to the 5% loan will reduce that balance faster but the 19% card will keep accruing much more interest — increasing total interest paid and extending the time until you’re debt‑free.

What federal rules say

  • The Credit CARD Act (and related FTC/CFPB guidance) affects how payments are applied inside credit card accounts — especially payments over the minimum — and aims to protect consumers from practices that extend high‑rate balances. See the CFPB for consumer guidance on payment application rules: https://www.consumerfinance.gov.
  • There is no universal rule forcing banks to apply payments from one account type (loan vs card) to another in any particular order. That choice is governed by your agreement with the creditor.

Actionable steps you can take

  1. Read your cardmember agreement or loan contract to learn the issuer’s allocation policy.
  2. Call customer service and ask exactly how extra payments are applied; request that overpayments be directed to the highest‑interest balance when possible.
  3. Make targeted payments — use the payment memo or online controls to specify which account or card balance you want to reduce first.
  4. Use debt‑reduction strategies: the avalanche method (highest APR first) minimizes interest; the snowball method (smallest balance first) can help with motivation.
  5. Consider consolidation or balance transfers if you can move high‑interest card balances to a lower‑rate personal loan or promotional balance transfer — but watch fees and the transfer APR. For guidance compare options in our article “When to Use a Personal Loan Instead of a Credit Card” and “When to Use a Debt Consolidation Loan vs a Credit Card Balance Transfer”.

Common mistakes to avoid

  • Assuming every payment automatically goes to the highest interest balance.
  • Only making minimum payments — this preserves high‑rate balances.
  • Overlooking posted allocation rules or failing to tell the creditor how to apply extra payments.

Further reading (internal resources)

Author note and disclaimer
In my 15 years helping clients with debt management I’ve repeatedly seen payment allocation misunderstandings add thousands in avoidable interest. This article is educational and not personalized financial advice. For help tailored to your situation, consult a certified financial planner or your loan servicer.

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