Choose card billing dates carefully to optimise interest-free period

Zero-interest loans on credit card purchases come with high EMIS over short tenures. Make sure you can pay them

The Reserve Bank of India (RBI) has announced new rules for credit, debit and cobranded cards, which will come into effect from July 1. The primary aim of many of these rules is to protect customers’ interests and prevent issuers from taking undue advantage. Here’s a look at how these changes will affect customers, and how they can benefit from them.

Choose your billing cycle

The RBI rule says: Issuers do not follow a standard billing cycle for all credit cards sold. To provide flexibility in this area, cardholders shall be provided a one-time option to modify the billing cycle of the credit card according to their convenience.

Now that customers can select the billing date, how should they make this choice? Adhil Shetty, chief executive officer (CEO), Bankbazaar, says, “Consider the gap between the time your salary is credited and the bill due date. A week's gap is ideal as it gives you enough time to clear the bill. If the bill date is closer to the end of the salary cycle, it can get stressful.”

A customer who has more than one credit card should schedule the bill dates such that they don’t cause stress. Raj Khosla, founder and managing director, Mymoneymantra, says, “If you have two cards, have one billing cycle around the 1st and the other around the 15th of the month. This will allow you leg room in both utilising free credit and in paying the bill.”

If you need to use a card on the 10th, don’t use the one that will bill you within the next 510 days. Use the one where the bill will be due a month later. If you pay in full on all the cards, you can use multiple cards, get free benefits, while never paying interest.

M Barve, founder, MB Wealth Financial Solutions, says, “To improve your credit score, pay before the bill is generated, or whenever your credit utilisation level climbs too high.” Avoid using more than 40 per cent of the credit limit on any one card as doing so can adversely affect your credit score.

Avoid over-leveraging

The RBI rule says: As holding several credit cards enhances the total credit available to any consumer, issuers will assess the credit limit for a card customer taking into consideration all the limits enjoyed by him from other entities based on self-declaration or credit report.

If lenders take an aggregate view of a customer’s available credit while assessing her application, that can prevent overleveraging. Gaurav Chopra, chief executive officer (CEO), Indialends says, “The rule encourages consumer protection, responsible lending, and risk management for lenders.”

Customers should assess their lifestyle and select a cobranded card most suited for it. Chopra says, “Begin by choosing the card that provides the maximum benefit for your biggest spend category.”

He adds that applying for too many new credit products within a short span marks out the customer as being credit hungry and has an adverse effect on her credit score.

With so many credit options like Buy Now Pay Later (BNPL), Line of credit, and personal loans (instant) available these days, how many credit cards should one have?

The right mix of credit products is a function of an individual’s financial goals and lifestyle aspirations. Barve says, “Two credit cards with decent credit limits is the sweet spot.”

Set limit before handing out add-on card

The RBI rule says: Add-on cards shall be issued only to persons specifically identified by the principal cardholder under personal credit card categories. Add-on cards shall be issued with the clear understanding that the liability will be that of the principal cardholder.

An add-on credit card essentially has the same features as the primary credit card and can be availed by the primary cardholder’s immediate family members. Vishal Dhawan, board member, Association of Registered Investment Advisors (ARIA), says, “Before handing over an add-on card, educate your spouse or child about how credit cards work, and how they could induce overspending on discretionary items.”

Set spending limits on addon credit cards to prevent excess spending by them. Dhawan says, “Also illustrate with numbers to the add-on card holder how rolling over credit card debt can quickly lead to a debt trap.”

Beware of short tenure, high EMI

The RBI rule says: Issuers shall ensure complete transparency in the conversion of credit card transactions to equated monthly instalments (EMIS) by clearly indicating the principal, interest and upfront discount provided by the merchant or card-issuer (to make it no cost), prior to the conversion. EMI conversion with interest component shall not be camouflaged as zero-interest or no-cost EMI.

Sachin Vasudeva, associate director and head of credit cards, Paisabazaar.com, says, “This will bring in more transparency and increase consumer awareness about the total transaction cost when they convert a purchase into an EMI. The chances of mis-selling will reduce.”

No-cost EMIS are helpful for consumers who can’t afford upfront payment for goods, as they don’t have to pay any interest. However, costs like processing fee (if any) and Goods and Services Tax (GST) apply. Consumers must, as in any credit product, pay back the EMIS in full, and on time. Failure to do so can lead to higher finance charges and affect their credit score.

Vasudeva says, “Some providers may offer the ‘no-cost EMI’ facility only for shorter tenures, so each instalment will be bigger. Opt for this facility only if you are confident about repaying the EMIS on time.”