The Buyt Desk
RBI (reserve bank of India) wants card issuers and banks to select a way for calculating the minimum payment due on credit card bills ensuring that it doesn’t result in negative amortization. Unpaid fees, taxes, or levies ‘shall not be capitalized for charging or compounding of interest’ stated the central bank earlier in a master directive – ‘Credit Card and Debit Card: Issuance and Conduct Directions, 2022’.
The banks and card issuers were asked to implement this rule into their practice right from October 1, 2022.
According to Paisabazaar’s Director & Head of Cards – Sachin Vasudeva, “this new rule will require the credit card issuers to apply the minimum amount due at an extent high enough so that the complete outstanding debt can be easily cleared over a certain period.” Moreover, additional penalties, any financing charges, or taxes related to the outstanding amount should not be capitalized in the next statement, he further added.
Working of this New Credit Card Rule
The remaining amount on your credit card account will be applied to some interest if you pay just the minimum amount due on your bill. The interest will also be charged on all new payments. It will continue until you completely pay the previous balance. The interest on the credit card balance will be calculated as: (total days counted from the transaction date x outstanding amount (amount due) x monthly interest rate x 12 months)/365.
Example: –
Your credit card bill is formed on the 10th of the month and you make the purchase of Rs 10K on the 1st of the month. The last (due) date to pay your bill is the 25th of the month and you clear just the minimum amount due of Rs 500. The interest for the next bill would be calculated on the due amount of Rs 9500 for 40 days subsequent bill. It will be the duration from the spending date to the subsequent bill date. The interest will be calculated on your interest each month in case you don’t pay the complete amount and pay just the minimum amount.
If that would be the case, the interest applied over some months can go beyond the usual minimum amount payable of 5% of the due debt when the outstanding value is too high. In that condition, the credit card will gain interest, which eventually increases the due balance. In simpler terms, you would be paying interest over your interest with no overdue decrease. This is an example of negative amortization, stated by Bank Bazaar’s CBO – Pankaj Bansal.
Completely paying the balance is difficult for a consumer when the minimum credit card payment amount is established as highly low. The principle increases over time even with regular minimum payments. Vaishishtha stated that the reason for this is that loan charges and other fees keep collecting with every payment cycle. The due amount will constantly grow if a consumer continues to clear just the minimum amount required every month.
As per RBI regulation, the card issuer can establish a higher minimum balance like 10% of the sum due instead of 5%. It helps in ensuring that the minimum amount consists of principal repayment and due balance interest.
Think360.ai Co-Founder and CEO – Amit Das said that the minimum credit card payment should be equal to or greater than the total amount owed in charges and interest including the sum remaining on the principal of the card.
Let us assume that your credit card account has a due amount of Rs 10K at the month’s end. Interest is calculated at the 2% rate of the month. So, you will have to pay Rs 250 along with tax, other fees of Rs 50, outstanding, plus interest of Rs 200 if you don’t pay the complete amount on or before the due date.
To prevent interest from being calculated in a subsequent statement, the minimum value should be Rs 250. To timely pay the debts, a reasonable amount must go towards your principal payments. Consumers are always recommended to make their complete payment on time unless it’s an emergency. When a financial emergency doesn’t allow you to pay the full amount due before the due date, convert the balance to EMIs (equated monthly installments) at a comparatively lower interest rate.
OTP-Based Permission
The card issuer should initially get OTP-based permission when a consumer has not enabled their card for over 30 days from the issuance date. When the cardholder rejects the card activation request, the issuer has to deactivate the account without putting a charge within 7 working days. Card activation and charges without the knowledge of a customer have occurred most often; by demanding approval, this would not occur and the customer would be charged nothing.
Credit Limit Approval
Credit limit approved and conveyed to the customer should never be increased without the express permission of the customer, stated by card-providing companies. Cardholders will receive just alerts about hikes in credit limits. No card issuer will be allowed to increase the limit after October 1, 2022, without the express written permission of the cardholder.
Interest Rates
Terms and conditions (T&Cs) for credit card balance payment including the minimum amount due must be specified to avoid negative amortization. Taxes, outstanding levies, and other charges should not be applied to charge or compound interest, as per the master circular of RBI. ‘Capitalized interest is the inclusion of due interest charges to the loan balance’ – the American Express website.
