Banks told to explain computation of credit card rates and fees

Published September 28, 2020, 5:31 PM

by Lee C. Chipongian

Banks will be required to explain how they will compute credit card interest rates, finance charges and fees to cardholders but they should do it in a “practicable” way, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said in a memo.

Based on BSP Circular No. 1098 (“Ceiling on Interest or Finance Charges for Credit Card Receiveables”), signed by Diokno on September 24, credit card issuers or banks will notify cardholders within 90 days prior to any change in the computation of rates and fees that will affect the outstanding balance after these changes are implemented on November 3. How they will arrive at a new credit card balance based on method of computing and imposition of interest or finance charges will have to be disclosed – in a simple way that will be easily understood — to the cardholder.

The circular, which will be reviewed every six months, detailed the directive for banks to impose an interest or finance charge that will not exceed 24 percent per year on all credit card transactions. The exception is credit card installment loans which will have a monthly add-on rate that will not exceed one percent. Cash advance transactions, in the meantime, will also have no other charges or fees apart from the maximum processing fee of P200 per transaction.

In a September 17 resolution by the Monetary Board, banks are not required to inform or notify cardholders of the change in interest or finance charges on credit card transactions or cash advances.

However, the information or explanation on the computation of any change in outstanding balance will be provided. This provision is important since credit card issuers do not explain in layman’s terms how rates or charges are computed. This issue was especially brought into attention after millions of cardholders were left confused on how banks computed interest rates after implementing grace periods as mandated by the Bayanihan Act. Attempts at explanation done by banks’ customer service representatives – lockdown times or even in normal period — do not count as these are sorely lacking in details and ultimately unsatisfactory, as evidenced by the number of complaints being forwarded to the BSP consumer affairs department.

Based on the new circular, the information to be disclosed to cardholders should include a “detailed explanation” and a “clear illustration” on the method of computing rates and charges.

In the circular memo, Diokno said banks should do this “to the extent practicable.”

The ceiling will be on credit card interest or finance charges on all credit card receivables including cash advances and installment purchases and cash advances’ maximum processing fee. But the rate of interest “including commissions, premiums, fees and other charges, on any loan or forebearance of any money, goods or credits regardless of maturity and whether secured or unsecured, shall not be subject to any regulatory ceiling,” according to the circular.

Based on central bank data, the average annualized interest rate on credit card receivables range from 18 percent to 58 percent for the January to June period. The credit card business activity report, on the other hand, showed that the average annualized interest rate for all types of cardholders both for premium and non-premium as of June 2020 was at 26 percent.

The BSP said it will be closely monitoring banks’ credit card interest rates, other charges and fees after the November 3 effectivity date of the circular.

As of end-July this year, credit card receivables or loans amounted to P409.069 billion, up 27.4 percent from same time in 2019 of P321.055 billion, based on BSP data.