RBI extends moratorium on credit card dues by 3 months: Here's how it will impact you

The Reserve Bank of India (RBI) has extended the loan moratorium period by three months to August 31, 2020. This is a breather not just for those who have taken term loans like home, auto and personal loans, but the moratorium extension applies for credit card dues as well. The moratorium on loan EMIs and credit card dues is available for the months of March, April, May, June, July and August.

With this extension, the RBI has permitted banks and credit card issuers to grant three more months of moratorium for payment card dues from June 1, 2020 to August 31, 2020.
For someone who opted for three-month moratorium on credit dues payments, this is what will happen, money-wise, due to the extension.

What happens to your credit card dues?
RBI took this step to provide borrowers temporary relief in the economic upheaval caused by the coronavirus related lockdown. However, by opting for the moratorium you should keep in mind that the interest will continue to accrue on the unpaid dues during the moratorium period, that is, for 6 months.

Adhil Shetty, CEO, BankBazaar.com said that now, with the extension of loan moratorium facility on all term loans (including your credit card dues) by three months, borrowers would get a six-month EMI holiday for dues falling between March 1, 2020, to August 31, 2020. However, it will be worthwhile to re-emphasise this extension of loan EMIs is by no means a waiver on repayments as interest will continue to get accrued on the principal outstanding. "So, simply put, you'll be well-advised to take the moratorium option only if you're finding it extremely difficult to repay your loans during these six months. You need to be even more cautious if you're planning to defer your credit card dues because those carry some of the highest interest rates among all financing facilities," Shetty said.

Normally, you can defer payment by paying 'minimum due amount' and rollover the balance outstanding amount to the next month. In this process the unpaid amount (balance outstanding amount) is carried forward to the next billing cycle and 2-4 per cent interest is levied on the outstanding amount.

Apart from this, if you make any further purchases during these six months, the interest on the new/additional expenditure will start accruing from the very first day and you might end up paying huge interest costs.

Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas said that albeit for a limited timeframe, individuals and corporates enjoying credit card limits benefit with the extension of a 3-month moratorium till August 31, 2020. "It is imperative that this not be treated as a blanket extension, as interest continues to accrue on the card dues and needs to be paid. Interest rates on credit cards are usually high and given that the impact of COVID continues to remain fluid, this relief should be availed with extreme caution," Sivaramakrishnan said.

The moratorium math
Let's first take a basic illustration of a credit card statement. Here in this example, the total credit card dues to be paid by the customer are explained in two scenarios, assuming the customer transacted on March 1, 2020, and will not be carrying out any fresh transaction thereafter during the moratorium period ending August 31, 2020.

BASIC ILLUSTRATION OF A CREDIT CARD STATEMENT
Transaction date: March 1, 2020
Transaction Amount: Rs 10,000
Statement Date: March 6, 2020
Minimum Amount Due (generally 5 percent of total purchases): Rs 500 [5 per cent of 10,000]
Total Amount Due: 10,000
Amount Due Date: March 26, 2020
Assumed monthly interest rate of 3.5 percent on unpaid credit card bill (rollover outstanding amount)

ACTUAL BILL PAYMENT
Scenario 1: WHEN YOU DON'T OPT FOR MORATORIUM
Bill payment before the due date within the same month
Bill amount fully paid on March 25
Total payment made: Rs 10,000

Calculation:
Interest levied for 25 days (Between March 1 and March 25): Rs 287.7 [25*10000*3.5%*12/365 = 287.7]
Total interest charged = 0

Note:
Interest will not be levied as you have made the payment before the due date. In such a scenario, the system will net off the interest charged, and you will not have to pay additional interest levied for it. To pay the credit card bill, you generally get a credit-free period of around 20 days from the bill/statement issue date.

Scenario 2: WHEN YOU OPT FOR MORATORIUM
Bill payment before the due date after three months
Total transaction: Rs 10,000 as on March 1
New Amount Due Date: September 26, 2020
Next statement dates: June 6, July 6, August 6, September 6 (statement will be issued every month)
Transaction done between March 6 to April 6: NIL
Transaction done between April 6 to May 6: NIL
Transaction done between May 6 to June 6: NIL
Transaction done between June 6 to July 6: NIL
Transaction done between July 6 to August 6: NIL
Transaction done between August 6 to September 6: NIL

Calculation:
Interest levied for 6 days (Between March 1 and March 6): 69 [6*10000*3.5%*12/365 = 69.04]
Interest levied for 31 days (Between March 7 and April 6): 357 [31*10000*3.5%*12/365 = 356.7]
Interest levied for 30 days (Between April 7 and May 6): 345 [30*10000*3.5%*12/365 = 345.2]
Interest levied for 31 days (Between May 7 and June 6): 357 [31*10000*3.5%*12/365 = 356.7]
Interest levied for 30 days (Between June 7 and July 6): 345 [30*10000*3.5%*12/365 = 345.2]
Interest levied for 31 days (Between July 7 and August 6): 357 [31*10000*3.5%*12/365 = 356.7]
Interest levied for 31 days (Between August 7 and September 6): 357 [31*10000*3.5%*12/365 = 356.7]

Total interest charged (in Rs): 69+ 357+ 345+ 357+345+357+357 = Rs 2,187
Total amount payable after 6 months will be Rs 12,187 (10,000 +2,187)

Note:
Interest on the complete amount of Rs 10,000 will be levied for the next 190 days till new statement is generated. You must make the payment before the due date, which in this case will be September 26, 2020 to avoid late payment charges. If you do not make payment by that time, it can then impact your credit score.

To pay the outstanding amount for six months on your credit card bill, you generally get a credit-free period of around 20 days from the bill/statement issue date which in this case will be September 6, 2020.

The benefit of opting for moratorium

• There will be no impact on your credit score
• The issuer will not block your credit card if the bill is not paid during these six months
• No late payment fees will be levied during these six months

What you should do
While, no late payment fees will be levied on your credit card bill during the moratorium period, the interest on the outstanding balance of credit card dues will continue to accrue during these six months. The interest will get added to your outstanding amount and therefore increase your payment burden when the moratorium gets over and you start paying your credit card dues.

Pranjal Kamra, CEO, Finology, a Raipur-based Fintech firm, said, "We would strongly recommend that individuals should not apply for the Credit Card moratorium if possible because the deferment has a high cost. You'll get another 3 months extra to pay off, but the interest burden will be quite high as compared to other types of loans (such as house loan or a vehicle loan)." he further said, "An average extra interest burden that you would have to bear would be somewhere between 25 and 50 percent. So, prefer applying for the moratorium on other loans but, try paying off the credit card bills."

So, opt for moratorium, only if you are facing a financial crunch during the lockdown, else it is better if you continue paying your credit card dues regularly.

Sahil Arora - Director & Head of Investments, Paisabazaar.com said, "As the finance charges on unpaid bills can range anywhere from around 24-49% p.a., the interest liability of those availing the 3-month moratorium extension will amount to 6-12% of their outstanding bill amount. Hence, credit card holders should avoid availing the moratorium to the extent possible. Those unable to repay their outstanding bill due to restricted cash flows should instead convert their outstanding bill into EMIs. The interest rates of such EMI conversion are significantly lower than the finance charges levied on the unpaid dues. The tenures of such conversion too can go up to 5 years enabling staggered repayment in smaller tranches in the form of EMIs."

Individuals must note that the interest calculations shown above are only illustrative and the actual interest calculation will vary based on your retail purchase, credit revolve behaviour and the interest rate applicable on your credit card. Therefore, they should do their own calculations, check with their bank regarding the terms and conditions attached and only then decide on whether or not to opt for the moratorium.