Depending on their credit policies and risk perception, how banks provide you the moratorium will differ from one bank to another, and from one credit card customer to another.

Credit cards are rather sophisticated payment tools. They are rewarding when used responsibly. However, careless usage can disturb your finances. Now, amid the Covid-19 crisis, the Reserve Bank of India has allowed a moratorium on credit card dues in addition to all retail loan EMIs. Meaning, you can defer the payment of your credit card dues incurred after March 1, 2020, until August 31, 2020, by taking the moratorium support. If you’re facing liquidity issues, opting for the moratorium on your credit card dues can provide you temporary relief and will not impact your credit score during these six months.

However, it is critical to understand that this is just a deferment of your dues and not a waiver of your repayment obligation. Interest on the outstanding amount will continue to accrue, and the card user will have to pay the entire outstanding amount (inclusive of the interest charges) on the due date falling immediately after the completion of the moratorium period, i.e., after August 31, 2020. So, if you’re planning to avail the moratorium on a credit card or have already opted for it, it’s vital for you to know how it works.

Key points to understand how the moratorium works

In normal usage, when you spend through a credit card, you get an interest-free period of usually up to 50 days to repay your bill. Your due date falls on the last day of the interest-free period. If you delay your payment, interest charges and late payment fee are levied on the outstanding amount and your credit score gets adversely affected. Credit card companies also give you the option of a “Minimum Amount Due” which is a fraction of the “Total Outstanding Dues” – normally 5%. If you pay only the minimum amount due, you keep your card account active and avoid the late payment penalty. However, interest charges are levied on your remaining dues.

In the case of a moratorium, most of the credit card companies have waived the requirement of paying even the minimum due amount during these six months. Non-payment of dues won’t be impacting your credit score as well. However, interest will continue to add to your dues until you repay them completely. The interest is charged cumulatively, i.e., the unpaid interest is added to the outstanding amount for calculating the next month’s interest, and so on. Thus, the outstanding amount snowballs until you clear the entire bill.

Check with your credit card company on how it’s extending the moratorium facility

It’s best to get complete clarity on how exactly the moratorium facility is offered in your case before making a decision. In some cases, you can avail of this facility by simply skipping your card payments on the monthly due dates. If that is how it works for your credit card account and you want to go for this facility, don’t forget to turn-off any standing instruction for auto-debit of your card dues. In other cases, you might have to inform your bank that you want to avail of this facility. Do note, however, that your credit card company might not offer you this facility if you haven’t cleared all your card dues before March 1, 2020.

Depending on their credit policies and risk perception, how banks provide you the moratorium will differ from one bank to another, and from one credit card customer to another. It will be worthwhile to re-emphasize to get complete clarity from your bank on these matters before deciding to use the moratorium.

So, should you opt for the moratorium on your credit card dues?

Since opting for the moratorium support would lead to interest charges in the range of 3-4% per month on outstanding dues, you must think it through before deciding. If you’re undergoing a cash-crunch and struggling to repay your dues, you should look for other options to clear your card dues before taking the repayment deferment. You can dig into your emergency fund or withdraw from your EPF account or pause/liquidate a non-essential investment to raise the necessary funds before opting for this facility. You can also seek a loan from your friends or family members. If nothing works, you may opt for the moratorium on your credit card dues as a last resort, but do have a plan in place to repay your outstanding dues in full ideally before August 31, 2020. Any further delays would not just lead to additional interest charges but also late payment fees, a damaged credit profile, and, most importantly, a difficult debt situation.

In conclusion, try to clear all your credit card dues on time without relying on the moratorium option. A fully functional credit card with unhindered access to its full credit limit could be of great value during these uncertain times. Your credit card would not just act as a convenient payment tool and a back-up plan during an emergency situation, its facilities like easy EMIs could also help you in converting an essential big-ticket purchase into bite-size instalments.

Credit card users with good payment track records also get offers of credit card-linked pre-approved loans which could provide an additional and immediate line of credit which requires no paperwork – another helpful facility that you could avail of if you face any financial difficulty.

That being said, if you’ve been able to clear your card dues in full without the moratorium support but are not sure about your finances in the near future, you may want to be careful about fresh credit card spends until your finances stabilise.

(The author is CEO, BankBazaar.com)