Some 9 million consumers can look forward to a kinder November for their wallet, thanks to the welcome move of the Bangko Sentral ng Pilipinas (BSP) to cap credit card interest rates.
While credit card penetration remains at the single digit among adults here in the Philippines, it is still a profitable market for many banks and financial institutions.
Until BSP’s recent pronouncement, credit card issuers could set their own interest rate based on market forces. As a result, the range was a low of around 33 percent to a high of 45 percent. Considering savings parked at these same banks earn us 0.00125 percent interest for the year, that’s a huge (and don’t you think unfair) discrepancy.
Your credit card company will defend their actions by citing that a credit card is an unsecured loan. This means they are lending to you at high risk because they hold no collateral. You could default and disappear tomorrow and that will count as a loss to them.
But with the strict screening checks, the risks are not as high as they claim to be. In fact, the blame for the majority of the delinquent credit cardholders lie not only with the consumers who do not pay but also with the lenders. In an effort to build customer base, they would aggressively issue credit cards to risky profiles (for example, college students or newly-hired workers). They also push loans, cash advances, installment payments and more as all these drive their profits.
Let’s go back to the good news: what does this mean for you and me and our love-hate relationship with our credit cards? Just because we now have a cap of 24 percent, let’s not use it as excuse to swipe and swipe. The new rate is still steep if you compare how much you can get for the same amount placed in a time deposit.
The new BSP policy takes effect on Nov. 3. Between now and then, your credit card company should be reaching out to you to explain the changes. Make sure you read the fine print when they do, and ask questions if anything does not look right.
In the past, credit card companies have to notify their clients of any changes on interest or finance charges at least 90 calendar days before these can take effect. BSP waived that too so there is no stopping them from making the adjustment by Nov. 3. For any concerns, you can reach out to BSP’s Financial Consumer Protection Department. They are quite responsive and can be reached via phone at (632) 708-7087, or you can send an email at firstname.lastname@example.org.
There are three changes that should bring you immediate relief if you are a revolver (owe balance and pay less than the full amount on your credit card), have one or more installment loans, and use the cash advance facility of your card.
No. 1 Your annual interest rate should now be 24 percent or less
Credit card companies typically declare their interest rate as a monthly add-on rate. This can be confusing as many consumers when asked actually think their credit card interest rate is only 3.75 percent, because that’s what it says so in their statement.
That view is both right and wrong. It is right because the rate is 3.75 percent but that’s the monthly rate so you have to add on the rest of the months in a year and that’s when you realize the 24 percent cap is a welcome reprieve.
The new policy provides that interest rates or finance charges on your unpaid outstanding credit card balance should not exceed two percent per month, or 24 percent annually. Make sure that your credit card company will adjust and comply.
In the past, credit card issuers offer different rates for different cards: high spenders would be given a lower rate and at-risk client charged more. Grab this chance to shop for rates and see if some credit card companies will offer lower than the cap. For me, that would be a good reason to switch so my holiday shopping will be subject to a lower rate (in case I fail to pay in full).
No. 2 Installment loans must charge 1 percent monthly add-on rate or lower
For Filipinos who love “gives”, that is paying on installment, the new policy’s cap on loans will provide more savings. Beginning Nov. 3, credit card installment loans may only charge monthly add-on rates up to a maximum of one percent.
If you owe several installment loans on your credit card, from tuition payments to your new washing machine to your insurance premium, all these should be recalibrated to the new interest rate scheme in the next 5 weeks.
A word of warning: one friend ended up with a pile of credit card debt from these installment loans. She signed up for a 24-month payment plan for her children’s tuition, not realizing that she will still be paying for the loan after the school year has finished. This meant she had to tack on another loan after 12 months, and then another after 12 months. In the end, she had to transfer her balance from one card to another with a negotiated rate. She is still paying it off.
No. 3 Cash advance fee capped at P200
I know better than to borrow against my credit card with a cash advance, but for some consumers who need cash right away, they are hostage to paying a fee as well as high monthly add-on rates.
Once I made a mistake when paying online and instead of paying my credit card from my checking account, my credit card “paid” my checking account. The next day, I was surprised to be charged a transaction fee and the one-day interest rate was also no joke.
If you can borrow from anywhere else, I strongly advice you not to use your credit card’s cash advance. This should be your last resort and if you have to, make sure to pay it off quickly.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.