Some 9 million consumers can expect a milder November for their wallets, thanks to the welcome decision by Bangko Sentral ng Pilipinas (BSP) to cap credit card interest rates.
Although credit card penetration remains in single digits among adults here in the Philippines, it is still a profitable market for many banks and financial institutions.
Until BSP’s recent statement, credit card issuers could set their own interest rate based on market forces. As a result, the range was from a low of about 33 percent to a high of 45 percent. Considering that the savings placed in those same banks are earning us 0.00125% interest for the year, that’s a huge spread (and don’t you think it’s unfair).
Your credit card company will defend its actions by claiming that a credit card is an unsecured loan. This means that they are loaning you at high risk as they do not hold any collateral. You could default and disappear tomorrow and it will count as a loss for them.
But with the strict screening checks, the risks are not as high as they claim. In fact, the responsibility of the majority of delinquent credit cardholders does not rest only with non-paying consumers, but also with lenders. In an effort to develop customer base, they would aggressively issue credit cards to risky profiles (eg, students or newly hired workers). They also push loans, cash advances, installment payments and more because all of these boost their profits.
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 24 percent cap, let’s not use that as an excuse to slip and drag. The new rate is always high if you compare the amount you can get for the same amount placed in a term deposit.
The new BSP policy will take effect on November 3. Until then, your credit card company should contact you to explain the changes. Make sure you read the fine print when they do and ask questions if something is wrong.
In the past, credit card companies had to notify their customers of any changes in interest or finance charges at least 90 calendar days before they took effect. BSP has also waived this so that nothing prevents them from making the adjustment by November 3. If you have any questions, you can contact the financial consumer protection department of BSP. They are very responsive and can be contacted by phone at (632) 708-7087, or you can email email@example.com.
There are three changes that should give you immediate relief if you are a gun (owe a balance and pay less than your full credit card amount), have one or more installment loans, and are using the Advance Facility of funds from your card.
# 1 Your annual interest rate should now be 24% or less
Credit card companies generally report their interest rate as an additional monthly rate. This can be confusing, as many consumers surveyed believe their credit card interest rate is only 3.75%, as that is what their statement says.
This view is both true and false. This is just because the rate is 3.75%, but it is the monthly rate, so you have to add the rest of the months of the year and this is where you realize the 24% cap is a welcome reprieve.
The new policy provides that interest rates or finance charges on your outstanding credit card balance should not exceed 2% per month or 24% per year. Make sure your credit card company will adjust and comply.
In the past, credit card issuers offered different rates for different cards: large consumers would be assigned a lower rate and risky customers charged more. Take this chance to shop around for rates and see if any credit card companies will offer prices below the cap. For me, that would be a good reason to switch to have my vacation purchases subject to a lower rate (in case I don’t pay in full).
Installment Loans # 2 must charge a monthly mark-up rate of 1% or less
For Filipinos who like to “give,” that is, pay on installments, the new policy’s loan limit will provide more savings. As of November 3, credit card installment loans can only charge additional monthly rates up to a maximum of 1%.
If you owe multiple installment loans on your credit card, from paying tuition at your new washing machine to your insurance premium, it should all be recalibrated to the new interest rate system within the next 5 weeks. .
A word of warning: a 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 school fees, not realizing that she would still pay off the loan after the end of the school year. This meant that she had to take out 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 always pays.
No 3 Cash advance fees capped at P200
I know better than borrowing with my credit card with a cash advance, but for some consumers who need cash right away, they are held hostage to paying fees as well as high monthly markup rates.
Once I made a mistake while 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 overnight interest rate was no joke either.
If you can borrow elsewhere, I strongly recommend that you do not use your credit card cash advances. This should be your last resort and if you have to make sure you pay promptly.
Warning: The opinions on this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.
Dill Ng-Lim, Paying It Forward, featured blog, blogroll, credit card, credit card interest rate, credit card interest rate cap, BSP