Credit Card at 9% p.a.?

IDFC FIRST BankIDFC First Bank is launching credit cards where the borrowers will have to pay only 9% p.a. as Annual percentage rate (APR) or the interest rate. This comes as a healthy surprise since we are used to 36%-40% p.a. APR on credit card debt. If you are new to this terminology, 36% p.a. APR means an interest rate of 3% per month on the outstanding amount. And that is a lot of interest. APR of 9% means an interest rate of 0.75% per month.

Not just that, the IDFC First Bank Credit card allows interest-free cash withdrawals for up to 48 days only for a nominal transaction fee of Rs 250 (plus GST). Usually, you do not get an interest-free credit period for cash withdrawals using a credit card. The interest gets charged from Day 1. The interest-free credit period is applicable for purchases. For cash withdrawals, the banks usually charge 3-3.5% per month in addition to the transaction fee. Again, a positive move for borrowers.

Sounds too good to be true? Well, there are a few caveats.

What Are the Caveats?

The credit cards will first be offered to the existing customers of the bank. Not all customers get 9% p.a. Your APR will depend on, among other things, your credit score, repayment behaviour, income levels and job profile. The existing customers will get better rates than new bank customers. The interest rate (APR) can vary from 9% p.a. to 36% p.a. and the exact rate for you will be determined through a proprietary method.

Well, this leads to a set of questions we do not have answers to.

  • What rate will you get? At what stage will you be communicated the APR for your credit card? Upfront during the application process? Unlikely.
  • Or once your application is approved? What good will be this card if the APR for you is 36%?
  • Or directly in your credit card statement?
  • Is the APR fixed or can change based on your repayment behaviour?

By the way, the low interest, if any, is applicable only if you pay at least the minimum amount due (MAD). If you do not pay even the minimum amount due, you will have to pay much higher interest rates.

Interest-free credit period for cash withdrawals is quite interesting. The card-issuing banks get a cut when your card is swiped or used for an online purchase. The bank is unlikely to get such a share when you use the card for ATM withdrawal (it might even have to pay a cut if you swipe the card at another bank’s ATM). However, the transaction fee of Rs 250 should cover for the interest amount forgone. A Rs 250 charge on Rs 25,000 for 45 days is an income of 8% p.a. Expect low caps on the cash withdrawal limit. It is also possible that the interest-free credit period applies to cash withdrawals of small amounts only.

Remember, usually banks charge transaction fee + interest from day 1 on cash withdrawals. Thus, in comparison, IDFC offerings look much better. By the way, we do not yet know if the interest-free credit period for cash withdrawals is applicable for everyone or for select customers.

How Does It Compare to Other Credit Cards and Personal Loans?

Low interest rate card without additional fees & charges. I begin with an assumption that you are eligible for a low interest rate (say 9%). In such a case, this could be a good alternative to a personal loan. A personal loan would usually come at a higher rate of interest. It will have a processing fee. You will likely incur prepayment penalty too if you want to foreclose the loan before schedule. There would not be any processing fee (for purchases) with the credit card. There is no concept of prepayment penalty too because you can pay off the entire amount whenever you want.

A low APR credit card might provide you greater flexibility in repayment too. A personal loan will have an EMI. For instance, a personal loan of Rs 50,000 for 12 months at 10% p.a. will have an EMI of Rs 4,395 for 12 months. On the other hand, in case of a credit card with a minimum amount due of 5%, you will have to pay only Rs 2,500 to avoid any penalties. Interest rate will still be applicable though. No such concept as tenure for credit card outstanding. You can drag it forever. Of course, you will have to pay a lot in terms of interest rates and penalties. Hence, if you expect cash flows to be stretched in the short term, this credit card (provided you are eligible for a low interest rate) can score over personal loans (or any other credit card).

The bank may re-assess the APR for your card at regular intervals. Therefore, if you do not make full payments for more than a few months, it is possible that the bank might increase your APR. It will be a sensible decision too from the bank’s perspective too. However, from your perspective, the purpose behind opting for this card may get defeated.

Note: If you are not eligible for a low rate, the entire argument in favour of this card falls flat.

Points to Note

While we discuss whether the IDFC First Bank Credit card is good or not, let us not forget that irresponsible borrowing can land you in trouble, no matter what the interest rates are.

The golden rules of borrowing still apply. You must repay what you borrow. Therefore, do not borrow that you cannot repay. Do not borrow just because you can.

It is the best if you pay your credit card bills in full and on time. Such prudent credit behaviour also prevents unnecessary spending to an extent, at least ensuring that you do not get into trouble simply because of excessive credit card spends. For such responsible borrowers, this credit card offers little value. However, in real life, we can all miss payments (not make complete payment) for some reason. When that happens, it is better to have a low APR card.

But, if a low APR credit card (such as the one under consideration) makes you spend more than you normally would, you are better off without such a credit card.

Source / Credit

Disclaimer: There is much that we do not yet know about this credit card. There is limited information about the credit card on IDFC First Bank website. I have relied on information available on various leading websites while writing this post. There can be many more caveats hidden in the fine print.

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