Should you pay your rent using a credit card amid coronavirus lockdown?
The coronavirus pandemic has led to pay cuts and job losses for many people. Consequently, some tenants may be facing a problem in paying rent due to a cash crunch.
In a situation like this, should you pay your rent using your credit card, especially if you have opted for the three-month moratorium?
Normally, a cardholder who pays the entire credit card dues every month may look at paying rent using credit card as another convenience. However, if you paid your rent via credit card and did not have sufficient funds to clear the card bill on the due date in the next month then it would lead to heavy interest charges and moreover, it would have affected your credit score.
If you have opted for the moratorium, then in such case, you can choose not to pay your credit card dues for three months (as per the Reserve Bank of India (RBI) guidelines) and no late payment fees is/will be charged. Also, your credit score will not get affected during this period. However, you must know that it is not a concession of any kind, it is simply a deferment of the payment to provide some relief if you are facing financial/liquidity issues. Do keep in mind that the interest will also get accrued during this period which you need to pay after the moratorium gets over.
As per RBI notification on March 27, 2020, a 3-month moratorium on repayment of credit card dues can be currently availed up to May 31, 2020. This facility may help a person to pay monthly rent via credit card but comes at a heavy cost.
Anuj Kacker, COO and Co-founder MoneyTap - a Bengaluru-based Fintech company, said that the moratorium relief on credit card dues announced by the RBI is a welcome move. However, it is important to understand the nitty-gritty of the postponement of payment, interest accrual, and eligibility criteria that differ across lenders. "Rent payment is one of the biggest monthly expenditures, especially for youngsters living away from parental homes. In the case of credit cards, accrual of interest gets tricky. If one decides to pay rent using a credit card while availing the moratorium at the same time, interest will be charged on the transactions. It is always advisable to weigh the cost and benefits and keep the outstanding amount minimum for credit card dues," he said.
How to pay rent using a credit card?
A credit card can be used to transfer money/make a payment by swiping it at merchants POS terminals/machines. It can also be used to pay money online through web portals/payment gateways hosted by authorized agencies. However, one cannot transfer money through credit card online to one's landlord directly unless the landlord has his/her own authorised web portal, which has to be linked to a payment gateway, to do so. This process requires to have a payment gateway to get the rent transferred via card.
A payment gateway helps in facilitating payments transaction by the transfer of information between a payment portal (such as a smart phone, websites, etc.) and the acquiring bank.
While Housing.com has recently launched a 'Pay Rent' platform on its mobile app to facilitate rent transfers using a Credit Card, HDFC Bank customers can also pay rent using a credit card by registering at the RedGiraffe website.
According to HDFC bank's website, "You need to fill in your details, along with that of your landlord on the RedGiraffe website. After the due process is complete, you are issued a RedGiraffe ID (RG-ID). You need to register this RG-ID with HDFC Bank. Once the one-time registration is complete, the monthly rent payments will start getting credited into your landlord's bank account each month on a predetermined date. A nominal fee is charged for this purpose."
Rent payment through credit card is a relatively new service offered by some fintech and real estate service providers. They act as a virtual intermediary between the cardholder (who is the tenant as well) and the house owner (landlord). The rent charged to the tenant's credit card is transferred to the house owner's bank account.
Sahil Arora - Director & Head of Investments, Paisabazaar.com said, "Cardholders should remember that such portals might levy a small convenience fee on using credit cards for paying rents. Hence, they should opt for rent payments through credit card only if the monetary value of the card benefits exceeds the convenience fee charged."
According to the RedGiraffe website, "There is a transaction charge of 0.39% per transaction + GST (i.e. Rs 39 +GST for every Rs 10,000/-)." This means for a rent of Rs 10,000, you will have to pay Rs 39 extra as transaction charges (excluding good and service tax).
Advantages
Arora explained that cardholders will also benefit from using credit cards for rent payments through apps and portals as they may receive the reward points, cash back or other credit card benefits applicable to their credit card spends. However, a cardholder will have to check whether the card issuer offers rewards/incentives on payment of rent via the card. "These portals also automatically generate rent receipts for rents paid through them, which can help their users in claiming their HRA exemption," Arora said.
For instance, if your rent is due and you don't get your salary on time due to Covid outbreak, you can pay the rent with your credit card and pay the credit card bill afterwards when you get your salary. This would also help you avoid an awkward discussion with your landlord about late rent.
This way if you are facing short-term liquidity crunch, you can use portals and apps enabling credit cards to pay your house rent. After the moratorium gets over, as per your credit card's billing cycle, you will get the interest-free period of around 30 to 50 days on your credit card. This will allow you additional time to manage the liquidity crisis.
Disadvantages
While the three-month moratorium will give you a longer credit period, the interest will also get accrued for that period. Therefore, unless it is absolutely necessary, you should avoid paying rent through credit card to avoid accrual of additional interest charges.
Once the three-month moratorium ends, you (credit card holder) will have to pay convenience fee, the outstanding amount on your credit card along with the interest accrued before the due date gets over. You must know that the convenience fee charges for paying rent through credit card is 0.39 percent (exclusive of GST) and the finance charges on the credit cards are usually around 40 per cent annually.
Finance charges mean the interest you are charged on a debt you owe for a time period. It is calculated using an annual percentage rate (APR) along with the amount of money you owe, and the time period for which you owe it.
Kacker said, "Rent is typically one of a person's large expenses. There will be no-hit on the credit card holder's credit score during the moratorium. However, if you don't pay it later, your credit score could go down drastically."
Hence, it will be best to pay your credit card dues (including the rent paid, if any) fully as far as possible, to keep the interest charges down and not let your credit score get affected after the moratorium gets over.
Manish Banerjea, MD & CEO – BOB Financial Solutions Limited, said that the credit card outstanding, if not paid back regularly during the moratorium as well, will balloon given the incremental rent transactions, and the principal and consequent interest on it to be paid post the moratorium will accumulate. Hence, if the facility is used during the moratorium, the cardholder should keep paying their credit card bills as much as possible. "You should also evaluate conversion of the rent transactions into equated monthly instalment (EMI), as this will reduce the interest burden," Banerjea said.
What do financial advisors say?
Amol Joshi, Founder, Plan Rupee Investment Services said that the initial transactional charge of 0.39% one time appears modest. The facility can be used to generate liquidity of temporary nature. However, it must be noted that just like credit card penal interest, interest here too is steep at around 40%, if dues are not paid on time. This is extremely expensive & one of the worst debts to have. It is not at all advisable to go for a revolving credit option. "In conclusion, use it only if you are sure that you will be able to pay it within due date. If not, use other sources or even withdraw from your savings or investments, even personal loan might be better," he said.
As the cost of paying your rent via credit card will increase sharply if the credit card dues are not paid on time, ideally you should avoid paying rent using the card. This method is to be used only as a last resort because paying off the credit card bills will become even more difficult if your cash crunch does not end soon.