The RBI wants banks and card issuers to calculate the minimum amount due on credit card bills in a way that does not result in negative amortization.
“The unpaid charges or levies, or taxes shall not be capitalized for charging or compounding of interest,” the central bank earlier said in a master direction – Credit card and Debit card – Issuance and Conduct Directions, 2022.
It had asked the banks and card issuers to implement this rule starting from October 1, 2022.
“The new rule requires the credit card issuers to set minimum amount due high enough so that the overall outstanding balance can be cleared over a reasonable period,” ET quoted Sachin Vasudeva, Director & Head of Cards, Paisabazaar, as saying.
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Moreover, finance charges, other penalties, and taxes that are applicable to the outstanding amount should not be capitalized in the subsequent statement, he added.
How this new credit card rule will work
If someone pays only the minimum amount due on credit card bill, then the interest will be charged on the remaining amount and all the new transactions until the previous balance is paid in full. The interest on the credit card outstanding will be calculated as: (the number of days counted from the date of transaction x outstanding amount x interest rate per month x 12 months)/365.
Let us assume that a credit card‘s bill is generated on 10th of the month and on the 1st of the month, you spent Rs 10,000. Your due date is the 25th of the month and you pay the minimum amount due of Rs 500. Now, for the next bill, the interest would be calculated on the outstanding Rs 9,500 for 40 days, which is the time from the date of the spending to the second bill date. If you continue to pay only the minimum amount, then each month, the interest will be calculated on the interest.
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