It’s better to opt out if your credit card issuer offers moratorium by default

Many credit cardholders were surprised to see text messages from their card issuers, saying that they have been auto-enrolled into the moratorium program until 31 August 2020. If they didn’t want to continue with it, some issuers asked to click a link and others asked to send a text message from the registered mobile number.

The Reserve Bank of India (RBI) had first asked financial institutions to offer a moratorium on term loans and credit between 1 March and 31 May this year. It was then extended it by another three months until 31 August. Different banks and card issuers adopted different approaches that they thought were more appropriate.

Some financial institutions asked customers to approach them if they wanted a moratorium, which is called an opt-in method. Others offered the moratorium by default. The customer had to contact the institution if they wanted to opt-out of it.

“RBI has left it to the discretion of the financial institutions to decide the process by which they want to offer the moratorium to their customers. They go by the board-approved policy for offering moratorium,” said Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co.

Some banks offered opt-in for loans and opt-out for credit cards. “Loans come with a fixed monthly payment structure. In credit cards, the customer has the option to pay anything upwards of 5% of the outstanding balance and rotate the rest. Some issuers, therefore, gave a moratorium by default on credit cards,” said Navaneetha Krishnan, head-credit policy and process transformation, BankBazaar.com.

If a customer has, say, ₹1 lakh outstanding on a credit card, he can pay ₹5,000. The balance amount of ₹95,000 will be carried forward to the next month, and the issuer will levy interest on it. “As long as customers are paying 5% or more on their cards, they will not be delinquent. But in case of a loan, missing even one equated monthly instalment (EMI) results in delinquency. Financial institutions could have, therefore, chosen to give the moratorium by default.

If you have been on moratorium without asking for it, opting out is a simple procedure. You can follow the card issuer’s instructions and opt out. On social media, many customers of an issuer complained that the link, which the company provided for opting out didn’t work. “Customers can continue to repay their dues, and they would be automatically opted out,” said Sahil Arora, director and group head (investments), Paisabazaar.com.

According to Arora, if customers have cash flows to make repayments, they should not opt for the moratorium. “Banks charge anywhere between 26% and 39% a year on the outstanding balance, in case of a credit card. Opting for a moratorium can result in the outstanding going up significantly due to the high-interest cost,” he said.

Credit card issuers charge interest every month. If you don’t repay, the issuer will add the monthly interest to the principal outstanding. In the following month, it will levy interest on the new amount, which will include the principal and interest charges of the previous month.

Opting for a moratorium on a credit card can even lead you into a debt trap. It’s best to pay off the dues as soon as you can.