The adjustment and methodology of the minimum balance required to be paid on the bill payment of a credit card has been changed by the Reserve Bank of India (RBI). Various credit card issuing institutions have also begun getting their customers aware of the same.
According to the guidelines issued by RBI, the MPD (minimum payment due) for the credit card shall be computed as greater of (100%*all the fees, taxes, and interest; 5% of the total amount of payment which is due as per the statement), in addition to the higher of (the previous due amount; the overlimit amount) and the EMI amounts which are due. All the above mentioned calculations have been brought into effect since 1st December 2022.
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The country head and senior VP of the department of retail cards and assets of Federal Bank, Mr. Chitrabhanu K G, claims that this particular computation method is quite beneficial for the consumers because there is no involvement of negative amortisation or finance charges and the taxes shall not get capitalised in the subsequent statement. The balance amount shall undergo revision in case there are any kind of payment reversals, payments, and sale refunds until the due date of payment. If the consumer pays a portion of the lower limit of the amount which is due prior to the last payment date, then the delayed payment fees shall be levied only on the amount which has been revised.
What Changed
The Reserve Bank of India stated that the T&Cs for the payments of the outstanding credit amount which includes the minimum due amount will be in a way that it ensures that there isn’t any kind of negative amortisation. The unpaid balance/taxes/levies will not undergo capitalisation for the interest compounding. Let’s take an example. Suppose you have a limit to your credit amount at Rs. 20,000 with an existing remaining balance of Rs. 15,000. Now, if the interest rate on a monthly basis is 2%, you will require an interest amount of Rs. 300. If we take an assumption that Rs. 50 has been charged as GST and any other charges, you will be required to pay at least Rs. 350 in order to be able to pay the interest amount calculated on a monthly basis. Hence, any amount lesser than Rs. 350 will lead to negative amortisation. This implies that you cannot repay your principal amount ever and make the payment of only the interest amount if you make the payment of the minimum balance. You can thus get trapped in a debt cycle.
In order to cater to this issue, the Reserve Bank of India has introduced a new method to compute the interest amount to avoid the interest capitalisation and any other charges included in the bill payment of a credit card, if you are only paying the minimum outstanding amount.
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Changes Laid Out on Interest Rates and Charges by RBI
There were several changes which were laid out on the interest rates and charges by the Reserve Bank of India (RBI). They are as follows:
- Explanation of Interest-free Period Suspension to be Displayed
There is an interest-free period of 20 or more in the case of credit cards. This implies that if you take a credit and repay the amount within the given stipulated time period, no interest amount will be levied. However, if there is a remaining balance of credit in your card, your interest-free period will be suspended on your following purchases. If there are any kind of new transactions made on the card, then you will be eligible for the interest-free period only if the remaining balance from the last bill has been paid off completely. If this balance amount gets carried over, the interest will definitely be charged on the outstanding balance as well as the new transactions.
- Penal Interest Shall be Charged on the Outstanding Balance
Reserve Bank of India has stated that the late payment fees, penal interest, and any other charges will not be applicable on the total amount. These will be levied only on the outstanding balance after the last date has passed. Other than this, a specific account will have to be reported as ‘past due’ by the credit card companies to the credit information companies. Or, penal charges will be applied by them when that credit card account has been due for 3 days or more.
- Transparency in Interest Ceiling With Respect to the Unsecured Loan Rates
The Reserve Bank of India has given a direction to all the credit card companies to prescribe an upper limit of the interest rates for the credit lines with respect to the unsecured loans, in addition to the processing fee and any other charges. If the interest rate varies because of the cardholder’s payment failure history, then the process of levying any such differential rates should be a transparent one.
The Reserve Bank of India also commanded that these interest rates and their rationale shall be auditable. Now that you have understood what a credit card is and how to save interest on your unpaid dues, you can now choose the best cashback credit card that suits your requirements.
