Late fees on credit cards rising — Know rules, charges and how to avoid them

• The Indian central bank, RBI, mandates that a late fee can be charged only three days after the due date.
  
• If payment is not made by the due date, interest is levied on a daily basis with a GST of 18% additionally charged on the interest
  
• Signing up for the autopay facility provided by the issuing bank, and setting up timely reminders for your due dates can help.
  

Using a credit card comes with several advantages. You basically get an interest free loan for 45 days, you get reward points which you can redeem for goodies. Plus, it also helps build credit history.

As long as you pay your dues on time, all is well and good. But if you cannot or do not, all hell breaks loose. Literally. What makes it worse is that penalties and late charges on credit cards have gone up in recent times.

“We have seen a rise in penalty charges and penal interest rates across the board. This varies depending on the card and the usage. There’s no standard hike,” says Adhil Shetty, CEO, BankBazaar.com, an online financial marketplace. However, in most cases, the late payment fees have gone up by a few hundred rupees across slabs.

Says Mohit Bedi, co-founder, Kiwi, a fintech that offers virtual credit cards,

“Notable players have hiked their charges pertaining to credit cards including late payment fees in the last one year.”

Shetty adds that around 11.67 million cards were added in the last financial year (FY23), and outstanding credit cards stood at 85 million at the close of the year.

At the same time, credit card spends rose 47% year-on-year, and credit card dues went up by 31%. While the credit card segment is not showing any signs of stress, issuers are taking a number of steps to mitigate potential risks from creeping in as the demand for credit cards continues to rise.

The pinch of late payment fees

What happens when you miss a credit card payment

It is noteworthy that the Indian central bank, RBI, mandates that a late fee can be charged only three days after the due date.

Once that deadline is missed, you will have to pay a late fee, and also interest charges that could be as high as 3.6% or more per month. Even if you make the minimum payment you have to pay the interest charges.

“Added to this it will have an impact on their credit score. Late payment fees charged on a credit card depend on the type of credit card and the amount due,” says Bedi.

Moreover, if payment is not made by the due date, interest is levied on a daily basis with a GST of 18% additionally charged on the interest as per Government norms.

Let us take an example.

Payment made after due date:

Transaction Date: 1 April 2023

Amount: ₹1,00,000

Statement Date: 6 April 2023

Minimum Amount Due: ₹5,000 (Usually 5% of non-EMI retail purchases + other charges such as joining fee, annual fee, etc.)

Bill not paid by due date, but later on.

Amount Paid: ₹50,000

Payment Date: 15 April 2023

Next Statement Date: 6th May 2023

● Interest levied for 15 days (between 1nApril and 15 April): ₹1,726
(15*1,00,000*3.5%*12/365)

● Interest levied for 21 days (between 15 April and 6 May): ₹1,208
(21*50,000*3.5%*12/365)

Total Interest levied = ₹2,934

GST on Interest = ₹528

Late Payment Fees = ₹1,000 (for eg. only)

Total Interest + Penal Charges = ₹4,426

With a little discipline you can avoid these charges

“The important thing to note is that the charges that have gone up are typically penalties and interest rates. With a little discipline, you can completely avoid them,” says Shetty.

“Signing up for the autopay facility provided by the issuing and setting up timely reminders for your due dates is also important,” says Bedi.

Moreover, today, most issuers allow users to convert purchases to EMIs at a very low interest rate. Some even have no-cost EMI options for select purchases. So it is possible for customers to revolve their credit without incurring very high interest rates.

Things can go wrong only if you spend more and miss your payments, or pay the minimum amount due. To avoid these charges, you need to spend wisely and clear all your dues on time.