Why RBI moratorium on your credit card dues is a bad idea

The Reserve Bank of India has allowed banks to offer a moratorium of three months on not just term but also on credit card loans for the period between March 1 and May 30. Before you go for it, you must understand  moratorium doesn't mean waiver of your credit card bill or EMIs. It only means no repayments for the three months, but interest on your credit card dues and loan outstanding will keep accruing each month. The only respite will be that your credit score will not be hit. Since interest rate on credit cards could be as high as 40 per cent, deferring the repayments could cost you a bomb.

"Credit card debt is unsecured and costly. The annualised rate of interest on credit card debt can easily be in the 40 per cent range, which is a lot compared to secured debt - home loans, for example, are currently priced around 8 per cent. Those who don't have ongoing liquidity problems can continue their repayments since they have little to gain by paying additional interest on an already pricey debt," says Adhil Shetty, CEO of BankBazaar.com.

Credit card payment start-up CRED explains this with an example:

If you have Rs 1,00,000 due as on March 3, 2020 and you take advantage of the moratorium till May 31, 2020, the dues payable on June 3, 2020 could be as high as Rs 1,15,000 -- Rs 1,00,000 (due amount) + Rs 15,000 (interest amount and other charges).

You may have to shell out the entire amount right after the end of moratorium, otherwise penalty/late payment charges will kick in. If you pay the minimum due, you may avoid the late payment charges but interest rate will be levied on the outstanding amount.

"You should continue paying your total due amount (or as much as is possible) within the due date to avoid interest charges at 36 - 42 per cent compounding annual interest rate," says Kunal Shah, founder and CEO, CRED.

So, if your payment is due anytime soon, you must approach your bank immediately and inquire about two things: Is the RBI moratorium mandatory for all borrowers or optional? If it is optional, you should make the payment by the due date. If it is mandatory or you are facing a cash crunch, you must check with them the details and conditions of the moratorium, especially rate of interest being applied and timing of the repayment. "You need to see the rate of return being applied by card providers during the break. Also check if they will recover the interest immediately after May 31," suggests Shetty.

If your credit card dues are substantial and you cannot pay it off right now, instead of opting for moratorium, you may take some personal loan to clear out your dues. "If your credit card bill may take a year or longer to pay off, do the interest math. Personal loan rates start from around 10 per cent and may be cheaper in the long run. But, you must be a smart borrower with stable income to be able to pay off one debt with another," says Shetty.

Also read: Don't consider lockdown-related loan repayment delays as default: SEBI to CRAs

Also read: Know the hidden truth behind RBI EMI holiday