- Date : 29/12/2022
- Read: 3 mins
A look at RBI’s new credit card minimum amount due calculation instructions
The Reserve Bank of India recently asked credit card companies and issuing banks to change the calculation mechanism of the minimum amount due. RBI wants a calculation mechanism that doesn’t lead to negative amortisation of the credit card due. In other words, the due amount shouldn’t increase after the payment of the credit card minimum amount due, due to the capitalisation of unpaid due, charges and taxes. RBI asked credit card issuers to implement this change by 1 October 2022. This was mentioned in its master direction – credit card and debit card – Issuance and Conduct Directions 2022.
New Rule on How to Calculate Credit Card Minimum Amount Due
The new credit card rule change directive will require the issuers to set a higher minimum amount due in credit card bills. Besides, they will not be capitalising finance charges, taxes and penalties in the subsequent statements.
The problem of negative amortisation arises when the cardholder pays only the minimum due for several months. Interest accrued on the outstanding balance eventually exceeds the minimum amount due of 5%. This continues to increase the outstanding amount, with the customer paying interest on interest. Thus, if the minimum due amount is low, the customer fails to pay the total due despite regularly paying the minimum due.
Now the card issuer will charge a higher minimum due, which could be 10% instead of 5%. Besides, the interest will be charged on the remaining balance and new transactions. Mathematically, it will be (Number of days from the transaction date X Outstanding Amount X Monthly Interest Rate X 12 Months) / 365 days.
Another practical example of the new credit card rules is explained below,
Assumption – Your credit card outstanding amount at the end of the billing cycle is Rs 1 lakh. The interest rate is 3% per month i.e. Rs 3,000, and other charges amount to Rs 500. So, if no payments are made till the due date, the new total outstanding will be Rs 1,03,500. As per the new rule, the minimum due cannot be less than Rs 3,500. In fact, it should be reasonably high enough so that the cardholder stands to gradually pay off the entire due, rather than just paying off the interest and charges every month.
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Minimum payments due is a leeway for you in months when you face a financially difficult situation. It should be treated as an exception rather than a norm. In other words, avoid paying only the minimum due and pay as much of the total due as you can, every time.