JOIN USAs the regulatory authority, the Reserve Bank of India (RBI) has stepped in to protect the customer by putting in place a framework of rules and guidelines for credit card operations of banks.
Accordingly, banks are required to follow instructions laid down by the regulator in this regard. Concerning interest rates and other charges banks are advised to be guided by the instructions on interest rate on advances issued by the RBI and as amended from time to time.
Banks are required to prescribe a ceiling rate of interest, including processing and other charges, in respect of credit cards. The fact that higher interest rates are being charged to the cardholder on account of his/her payment/default history should be made known to the cardholder. For this purpose, the banks should publicise through their website and other means, the interest rates charged to various categories of customers. Banks should upfront indicate to the credit card holder, the methodology of calculation of finance charges with illustrative examples.
Banks should quote annualised percentage rates (APR) on card products (separately for retail purchase and for cash advance, if different). The method of calculation of APR should be given with a couple of examples for better comprehension. The APR charged and the annual fee should be shown with equal prominence. The late payment charges, including the method of calculation of such charges and the number of days, should be prominently indicated.
The manner in which the outstanding unpaid amount will be included for calculation of interest should also be specifically shown with prominence in all monthly statements. Even where the minimum amount indicated to keep the card valid has been paid, it should be indicated in bold letters that the interest will be charged on the amount due after the due date of payment. A legend/notice to the effect that “Making only the minimum payment every month would result in the repayment stretching over years with consequent interest payment on your outstanding balance” should be prominently displayed in all the monthly statements so as to caution the customers about the pitfalls in paying only the minimum amount due.
Further, banks are required to adhere to the following guidelines relating to interest rates and other charges on credit cards:
*Banks should step up their efforts on educating the cardholders of the implications of paying only ‘the minimum amount due’.
The “Most Important Terms and Conditions” should specifically explain that the ‘free credit period’ is lost if any balance of the previous month’s bill is outstanding.
*The banks should not levy any charge that was not explicitly indicated to the credit card holder at the time of issue of the card and without getting his/her consent. However, this would not be applicable to charges like service taxes, etc. which may subsequently be levied by the government or any other statutory authority.
*The terms and conditions for payment of credit card dues, including the minimum payment due, should be stipulated so as to ensure that there is no negative amortisation.
*Changes in charges (other than interest) may be made only with prospective effect giving notice of at least one month. If a credit card holder desires to surrender his credit card on account of any change in credit card charges to his disadvantage, he may be permitted to do so without the bank levying any extra charge for such closure. Any request for closure of a credit card has to be honoured immediately by the credit card issuer, subject to full settlement of dues by the cardholder.
*There should be transparency (without any hidden charges) in issuing credit cards free of charge during the first year, if so offered.
Code of Bank’s commitment
As per the code formulated by the Banking Codes and Standards Board of India and adopted by member banks, the banks are committed to explain to their customers the relevant terms and conditions such as fees, interest and other charges, billing and payment, method of computation of overdues, financial implications of paying only ‘the minimum amount due’, renewal and termination procedures, and any other information that the cardholder may require to operate the card.
It will be clearly seen from the above that the concept of a ‘free’ credit card is but a myth and the customer would do well to go through the “Most Important Terms and Conditions” (MITC) before applying for a credit card. Knowing about the various fees and charges associated with the credit card can equip the cardholder to manage his credit score prudently as well as keep his financial health in order.
(The writer is CEO at Banking Codes and Standards Board of India (BCSBI))