Reserve Bank of India (RBI) has announced a moratorium of 3 months on term loans including Credit Card dues as part of COVID-19 Regulatory Package. This has been misinterpreted in many ways and there is a lot of confusion going around.
In this article I will try to decipher the announcement relating to credit card dues so that you can take an informed decision. So without further ado, let’s get started?
What RBI Announced?
Below the the relevant excerpt from the RBI circular:
In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including housing finance companies) (“lending institutions”) are permitted to grant a moratorium of three months on payment of all instalments1 falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.
1 Instalments will include the following payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues.
This means following:
- Credit Card issuers are allowed to grant a moratorium, they are not obligated to. It means your credit card issuer may or may not grant the moratorium.
- The three month moratorium includes credit card dues also which is clarified in the footnote.
- The interest on credit cards dues will continue to accrue. You need to pay the interest on the total billed amount.
Should you go for it?
Credit card issuers generally charge an interest rate of 1.99% to 3.49% per month based on the credit card you hold. This translates to a horrific annual rate of 23.88% to 41.88%. If you choose to skip the credit card payment during the moratorium, you will still be charged at an interest rate of 23.88% to 41.88% per annum which is humongous. You will need to pay this interest to settle your credit card dues fully.
Also, to worsen the things, each subsequent purchase you make on your credit card, will not have an interest free period. The interest on these transactions would be charged from day one as there is no interest free period if you have an outstanding bill unpaid after the due date.
And that’s not all. Credit Card companies generally charge late payment fees apart from interest. RBI has not said anything about waiving these charges during the moratorium and these will get added to your bill too even further worsening the situation.
And finally the worst part, you need to pay 18% GST on interest paid and late payment charges. This will further increase your capital outflow.
By this time, it should be clear that you shouldn’t skip the credit card payments and settle the credit card dues on time. If you really can’t make the payment at this point of time, consider getting a personal loan or converting the outstanding to EMIs.
This three months moratorium on term loans is good for the businesses, but not for common masses. Since the businesses don’t have income right now due to COVID-19, they can get some breathing room by deferring their EMIs. Once things are back to normal, businesses will resume their day to day operations and their income will restore. They can resume the EMIs then, however they still need to pay the interest for these three months. This way their credit score is not hurt even though their business is.
However for normal people like us, this is not that useful. If you choose to skip payment of your credit card bill during the moratorium, it will not impact your credit score (CIBIL). However you will end up paying a massive amount in form of interest and late payment charges after three months. Hence I repeat, do not revolve the credit card outstanding even if your credit card issuer is providing you the moratorium. Settle the credit card bill in full, well ahead of the due date.
Are you planning to defer your Credit Card payment by three months due to the moratorium announced by RBI? Let me know by leaving a quick comment below.