Avoiding credit card default amid pandemic

Published August 24, 2020, 3:53 PM

by Chino S. Leyco

Credit cards are becoming essential for individuals in today’s lifestyle, allowing consumers to conveniently have their quick access to funds should the need arise, but this has to be revisited in light of the coronavirus pandemic.

As jobless losses due to coronavirus onslaught have started to pileup, some Filipino have relied to their credit cards to ride out each day of the quarantine period that almost entirely closed businesses across the country, thus affected family income.

While credit card is a financial management tool that allows one to keep track of expenses, some cardholders are still unaware on how to best manage and pay down their debts, so as to avoid serious default.

According to the Credit Card Association of the Philippines (CCAP), credit card debt continued to deter many Filipinos from owning a credit card, but in reality, going into debt does not come hand-in-hand with owning a credit card.

Ways to pay for credit card dues

Credit cards are a financial tool that provides cardholders with a credit limit that acts like a loan. Within that limit, cardholders can take as much credit as they want, but it is on the premise that  it will be paid on a certain date.

Maintaining the credit card in good standing is very important, and this could be done paying the total outstanding balance, or at the very least, the minimum amount due, on or before the due date.

To pay off credit card bills, the there are various means depending on bank or credit card provider.

There are over-the-counter payment, ATM, Auto-Debit Arrangement, and E-Wallet Apps. But also keep in mind that most of these methods usually take one to three banking days to process the payment.

Consequences of not paying your credit card debt

Should a cardholder paid for the credit card bill on time, but only paid the minimum amount required.

The remaining balance that was not paid for will be carried over to the following month, but the bank will apply an interest fee onto the unpaid balance.

But if the cardholder failed to pay even the minimum balance by the due date, then the bank can add a late payment fee as well. However, the Bangko Sentral ng Pilipinas (BSP) already barred banks to charge late payment fees and interest on interest during the lockdown.

Because the balance plus the interest will be carried over to the next billion cycle, if it remained unpaid, this is where the credit card debt will start to grow and grow over time.

Accumulating credit card debt

Failing to pay credit card debts will impact credit scores greatly, and having a negative credit score will affect the financial transactions the person will be able to perform in the future.

Cardholders build better credit scores through owning and using their credit cards or through loans. A credit score is a three digit number that’s calculated through several factors, one of which is how regularly you pay your debts and whether you do so on time or not.

If the borrowers does not pay off the minimum balance in 90 days, their credit score will take a hit. Constantly missing payments will make the credit score even worse.

Maintaining good credit scores makes it easier to apply for credit cards or loans in the future, and might even help to get better deals for long-term payments such as insurance premiums or property.

After all, credit score tells financial institutions whether a person can reliably pay off debts or not.

Even if the person has settled all the credit card debt, the damage has been done and a certificate of full payment won’t instantly change a negative credit score.

Remedies for outstanding

credit card debt

The BSP and members of CCAP have set up an Interbank Debt Relief Program (IDRP), a debt restructuring program to help cardholders make their debt repayments more manageable.

Debtors who wish to avail of the program must have credit card accounts that are at least six months old, with an outstanding balance of at least ₱10,000 per card and total credit card obligations of at least ₱100,000 for all cards.

If the bank is a participant of the program, acceptance is at their discretion once the proper documents are submitted. Once accepted in the program, the debtor will not be able to use any credit cards, whether they are delinquent or not.

The benefits of availing this program are lower interest rates with a maximum of just 1.5 percent, longer repayment terms that can reach 10 years for extreme cases, and the same interest rates that can be applied to not just one, but all of the debtor’s credit card accounts.

Through the IDRP, CCAP hopes to help alleviate credit card debt in the Philippines and help debtors pay off their outstanding payments.