One piece of good news for consumers came last week as the Bangko Sentral ng Pilipinas announced that it was capping the interest rate on credit card purchases at 2 percent a month, or a total of 24 percent a year. Starting on Nov. 3, credit card issuers can also charge monthly add-on rates up to a maximum of only 1 percent on credit card installment loans, and no other fee may be imposed or collected on cash advances except for a maximum processing fee of P200 per transaction. At the same time, the interest rates or finance charges on the unpaid outstanding credit card balance of a cardholder cannot exceed 2 percent a month.
The rate cap on credit card receivables will surely ease the financial burden on consumers and on micro, small, and medium enterprises, especially during this difficult economic environment caused by the COVID-19 pandemic, according to Bangko Sentral Governor Benjamin Diokno. Under existing rules, changes in interest rates or charges on credit card loans can take effect at least 90 calendar days after card issuers had notified cardholders. But this requirement has likewise been waived by the Bangko Sentral to expedite the effectivity date of the rate ceiling.
The interest cap is a big relief, as it represents a reduction of about 43 percent from the current average interest rate of 3.5 percent a month or 42 percent a year. It is also long overdue. The Philippines has one of the highest interest rates on credit card usage in the region. Available comparative data for 2018 showed that credit card issuers were charging 29 percent in Vietnam, 27 percent in Indonesia, and 15 percent in Malaysia and Singapore. Central bank officials also cited a recent study showing that Filipino credit card users were paying anywhere from a low of 18 percent to a high of 54 percent in finance charges for transactions made on these short-term credit card loans.
Setting a maximum ceiling on interest or finance charges on credit card transactions will now allow consumers to benefit from the current low interest rate environment. The rate on the Bangko Sentral’s overnight reverse repurchase facility — the basis for banks’ own loan pricing — remains at 2.25 percent. This has been the lowest policy rate since the beginning of the pandemic, and has benefited mostly corporate borrowers needing funds for their operations and even consumers buying homes and condominium units, leaving out credit cardholders until this recent policy decision.
The Bangko Sentral and banks issuing credit cards can actually do more to help consumers carry their debt burden. If regulators will only require banks to be as prudent in giving out credit cards as they are in extending corporate loans, interest rate charges on credit card debt can still go lower than 2 percent a month. As it is, banks charge high rates on credit card loans to allow them to recover losses from delinquent cardholders, or to ease the burden on them of high past-due receivables. In effect, if only those who are responsible enough and have the means to repay credit card obligations are to be given credit cards, delinquencies will go down and, subsequently, finance charges will go down as well.
The high interest rates charged on credit card purchases and advances may be the reason for the very low credit card penetration rate in the Philippines of less than 5 percent. The Bangko Sentral expects the lower charges to possibly entice more people to use credit cards, one indicator of financial inclusion that is, however, being sidelined by other digital payment solutions because of its high cost.
At the end of the day, it is still best to avoid debt as much as possible. Many people still use credit cards to buy unnecessary items and services. Online shopping has become so easy, enticing, and accessible — a form of therapy during these anxious times, in fact — that many get to realize the volume of their purchases only when the credit card billing statements arrive. Excessive debt can be accumulated this way and, naturally, delinquencies will follow. But for those who can’t avoid using credit cards especially for emergency purchases and are responsible enough about spending, the move of the Bangko Sentral to lower credit card rates is a long overdue relief.
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