How rolling over credit card balance can jeopardise your financial health

Instead, make use of EMIs and personal loans to repay credit card bills. If your dues are very high, go for secured loans

HDFC Bank, the market leader in credit cards, has hiked the finance charge (interest charged on rolled-over balance), late payment fee, and minimum over-limit fee from September 1, 2020. The spike in these rates, which are already quite high, has made it all the more essential for borrowers to exercise extra caution in handling their card dues.  

The bank has increased the finance charge from 41.88 per cent to 43.20 per cent on most of its credit cards. The late payment fee has been raised for all credit cards (except Infinia) from Rs 950 to Rs 1,100 for credit card bill amounts of Rs 25,000-50,000; and to Rs 1,300 for bill amounts of more than Rs 50,000. The minimum over-limit fee on its cards (except Infinia) has been increased from Rs 500 to Rs 550.

Another major player, SBI Cards, had increased its late payment fee on July 1 this year from Rs 600 to Rs 750 for bill amount of Rs 1,001-10,000, and from Rs 800 to Rs 950 for bill amounts above Rs 10,000.

IndusInd Bank also plans to increase its late payment fee for certain bill amounts from October 1, 2020. Other players may also hike their charges in the near future. "When one of the leading players increases charges, others tend to follow suit," says Pankaj Bansal, chief business development officer, BankBazaar.com.

Dis-incentivising roll-overs

Customers who pay their credit card dues on time will not be affected by these changes. But those who rollover their dues will have to pay a higher cost. "The idea behind raising charges now is to dis-incentivise customers from rolling over their credit card balances. With job losses and salary cuts happening all around, credit card portfolios of lenders could come under stress. So, banks want customers to pay at least the minimum balance," says Bansal. Adds Gaurav Gupta, founder and chief executive officer, MyLoanCare.in: "Customers are coming out of a six-month moratorium. Chances are that if they don't pay now, their accounts could go into delinquency. By raising charges, lenders are nudging customers to start paying."

Go for EMIs and personal loans

Credit card holders should do their best to repay the entire bill amount by the due date as interest rates on unpaid bill amounts are the highest among all types of credit facilities.

Those failing to repay their credit card bills by the due date due to sheer negligence or difficulty in remembering dates should register themselves for autopay and other forms of standing instructions. “Various payment platforms have started offering credit card bill payment services, which send reminders or notices about credit card bills and their due dates. Pay heed to them,” says Sahil Arora, director, Paisabazaar.com.

If customers have the money but are trying to preserve cash, that is not a good strategy to adopt, at least vis-a-vis credit card balances, given the high interest rates on these dues. Says Arora: "If you can't pay the entire credit bill due to liquidity constraint or income disruption, one option you can exercise is to convert it into EMIs based on your repayment capacity." The interest rates on such EMIs is lower (around 18-24 per cent) than the finance charges on credit cards.

Another option is to take a personal loan, where the interest rates are even lower—10.5-15 per cent, depending on the borrower's credit profile. "When a credit card customer goes for these options, he brings down his cost of borrowing. He also gets a longer tenure to pay off his loans, since the tenure on such options (EMIs or personal loans) can go up to four-five years and he can repay small amounts every month. The limit on his credit card also gets freed up," says Gupta.

If the credit due is very high

Those who availed of the moratorium would have found that their debt burden escalated rapidly, given the steep interest rates on card balances. Such customers should try to take secured loans to pay off their dues on credit cards (and even personal loans). Gold loan is an easily available form of secured loan. “Borrowers who have substantial gold holdings should borrow against them,” says Arora. Interest rates on gold loans begin from 7.5 per cent and move upward, depending on the lender, loan amount and loan tenure.     

Younger salaried employees, who typically do not have surplus gold but often have a home loan, may go for a top-up home loan. “A top-up home loan is an attractive option as the interest rate on it is currently in the range of 7.5 to 8 per cent plus,” says Gupta.

SBI offers an overdraft facility on its Maxgain home loan. “If you have prepaid your home loan, then you can withdraw that money and use it to repay more expensive loans,” says Bansal. This facility works as a substitute for a top-up home loan. The interest cost to the borrower is the same as on his home loan.

Salaried people may also draw upon their Employees Provident Fund (EPF) corpus to repay their credit card outstanding. The government has allowed EPF subscribers to withdraw up to three months of their basic and dearness allowance component or 75 per cent of their EPF balance, whichever is lower, to help employees deal with the pandemic-induced financial distress. This option should be used only as a last resort as it is best not to touch one’s retirement corpus.