What Should Be The Proper Credit Card Charges – Philippines | Interest & Penalties

Credit cards are helpful financial mechanisms that are made available to the public, subject to certain approval guidelines. Never mind for the meantime credit card charges and especially in times of financial distress, use of credit cards has been the most convenient way of having immediate financial alleviation.

Credit cards, for middle class and those who have no liquidity yet, can bridge the gap between financial needs and ready accessibility to funds. It is in this instance where credit card may be of great value.

Nonetheless, when the immediate needs and wants have been attended to for which the credit card was utilized, here now comes the card bills, which at times may also cause headaches to the cardholders. Pegged generally at 3.5% monthly interest rates, when not settled in full the accumulated card expenditures for a given month, it will result in the imposition of another finance charges, on top of the 3.5% interest rate. Simultaneously, late payment penalties can also be imposed.

This will often cause accumulation of indebtedness, consequential to compounding obligation. Before the user knows it, the indebtedness has already ballooned. Initially, when someone applies for a credit card, he or she is usually being approached at the mall or being offered one in the middle of a banking transaction.

Then, when the person desires to avail,  he or she will just sign a pro-forma brochure , and the same will be subjected to processing and evaluation. When approved, that person will be issued a credit card, with an expenditure limit, which can increase overtime, depending on the good use of such credit card.

Hence, the credit card application will serve as the documentary evidence of the meeting of the minds between the credit card company and the applicant who has been approved for credit accommodation.

In effect, the resulting agreement is occasioned by the signing of the user of a fine print document, which is classified as a contract of adhesion. There is no room for a stipulated negotiation. It is a take-it or leave-it scenario.

Most of the time, the credit card applicant will just sign the brochure, without faithfully knowing and absorbing the full contents thereof, especially laymen who are just trying to get by. At any rate, in their minds, except for the annual fees, “ah if I do not use my card, I will not be charged, and it is merely a standby guarantee”.

What fees are charged on a credit card?

Numerous credit card fees are levied, and while they may look minor at the moment, they can build up over time. It’s a good idea to educate yourself on the charges we will, subsequently, discuss, as well as the actions you may take to avoid them. Paying on time, having enough money in your bank account, and staying under your credit limit are just a few simple techniques to prevent costly penalties.

Credit card charges

Here are the usual credit card charges:

1] Annual Fee

In order for you to keep the card account active, the credit card provider will automatically apply yearly fees to your account. They are a regular charge on a credit card. The price you pay for the benefits of your credit card are annual fees. Not all credit cards could be subject to these fees. The credit card gives more advantages the higher the yearly fee.

2] Interest Charges

If you do not pay off your credit card debt in full each billing cycle, you will be charged interest. Your cardholder agreement specifies your annual percentage rate and the amount of interest you must pay (APR). The majority of credit cards have variable APRs that fluctuate with the prime rate, while others have fixed APRs that are unaffected by changes in the prime rate.

However, because your APR is likely to fluctuate, check your online account and/or most current statement to see the APR that is applied to each billing cycle. Keep in mind that the grace period may not apply to all acts, such as obtaining a cash advance. In this situation, interest would start accruing the day after your cash was withdrawal.

3] Late Payment Fee

If your credit card issuer does not collect the minimum amount due on your account on time, it may impose a late payment charge. The late payment fee is detailed in the credit card agreement for your card. If you are charged a late fee, it should appear on your next billing statement. Credit card late payment fines have their own set of restrictions.

4] Foreign Transactions

A foreign transaction fee is charged by the credit card provider when a transaction is made overseas or with a foreign firm. Such fees may also apply to purchases purchased online from overseas merchants. International transaction costs are not usually the same as currency conversion fees, which may be levied on top of international transaction expenses. Many banks and credit card companies will charge international transaction fees if a local customer transacts overseas or online from a foreign website.

5] Balance Transfer Fee

A balance transfer fee is the amount of money that a lender charges a borrower to transfer existing debt from another institution. Credit card companies typically charge this fee when users move balances from one card to another. Typically, the fee is a percentage of the total amount submitted by the debtor. Many lenders offer new clients promotional incentives that may include free or low-cost debt transfer fees.

6] Cash Advance Fee

The bank will charge you a cash advance fee if you use your credit card to obtain cash. Cash advances may appear to be an easy way to get cash quickly, but often come with substantial costs. This fee is either a fixed cost per transaction or a percentage of the cash advance amount. Card issuers often charge a fee for each cash advance, depending on how frequently you take money.

7] Over the Limit Fee

When a credit card customer goes over their credit limit, they are charged an over-limit fee. Businesses could previously pick the severity of their over-limit fines, but they are now only permitted to charge up to the amount that was exceeded. Although the fee cannot exceed the amount spent in excess of your credit limit, card companies may charge you if you exceed your credit limit. This pricing varies from others in that you must choose whether or not to accept it.

8] Returned Payment Fee

A returned payment fee is charged when your credit card issuer charges your account due to insufficient funds or when your account is unable to conduct a transaction for a number of reasons. If you wish to pay your credit card bill but don’t have enough money in your bank account, your payment may be returned. As a result, your card provider may charge you a returned payment fee.

Current BSP interest rate protocols | Proper credit card charges pertaining to imposition of allowable interests

The Philippines has changed its tax and regulatory environment throughout the course of the last year after being declared in a state of disaster as a result of COVID-19. Memorandum Circular No. 1098, specifically, was released by the Bangko Sentral ng Pilipinas (BSP).¹

Memorandum Circular No. 1098 – Bangko Sentral ng Pilipinas

Said circular² establishes the maximum interest and finance charges that banks and other non-bank financial institutions (NBFIs) can charge on credit card receivables, in the process of carrying out its duties of supervision under the Philippine Credit Card Industry Regulation Law toward banks and credit card issuers.

One might be astonished to learn that there was no cap on the interest and financing charges that banks and NBFIs could charge on credit card receivables because the BSP operated a market-oriented interest rate policy previous to the release of the Memorandum Circular.

This is likely the cause of the Philippines’ comparatively high credit card interest and financing costs when compared to other ASEAN nations, according to the BSP’s assessment. In reality, numerous banks have been seen increasing their interest and finance costs during the epidemic, with some reaching as high as 32.8 percent annually as of June 30, 2020.

In order to lessen the financial burden on consumers, especially micro, small, and medium-sized businesses during the COVID-19 pandemic, the BSP decided to set a ceiling on the cost of lending through credit card transactions. This decision was made in the spirit of promoting responsible lending and taking current economic conditions into consideration.

Add-on Interest

The maximum monthly add-on rate for credit card installment loans (pertaining to those payable under an installment plan) is 1 percent. This monthly add-on rate is used to calculate the interest portion of the monthly amortizations of the installment loan. It differs from the monthly interest rate or finance charge placed on a cardholder’s outstanding credit card balance.

The BSP made it clear that installment loans taken out on or after 3 November 2020 are subject to the 1% cap. Therefore, even if there are amortization payments due on or after 3 November 2020, the credit card issuer is not obligated to reduce the monthly add-on rate to 1% if a cardholder has an outstanding installment loan as of 3 November 2020 that was first obtained on 3 September 2020.

Nevertheless, if a cardholder is unable to pay the monthly amortization due on an installment loan, that unpaid amortization must be taken into account when calculating the cardholder’s outstanding credit balance, subject to the monthly interest cap of 2 percent (or, in reality, the annual cap of 24 percent). The cardholder is still free to ask for a repricing or restructuring of his credit card installment loan even while the cap is in place.

Cash Advance ATM Features

For cardholders whose credit cards include a cash advance feature that permits cash withdrawal via ATMs, the BSP has decreased the upfront processing expenses of credit card cash advances at PHP200 for each transaction issued on or after 3 November 2020. (ATMs). No further upfront fees may be imposed or collected while getting credit card cash advances as needed, except from the processing fee.

Foreign Transactions

Foreign transactions are likewise subject to the Memorandum Circular’s interest rate cap and PHP200 processing charge cap. Therefore, international credit card transactions and international ATM cash withdrawals for cash advances are likewise subject to the same limits. The BSP also stated that credit cardholders who utilized the Bayanihan II’s 60-day grace period (applicable to all current and past due debts as of September 15, 2020) may likewise take advantage of the interest cap or ceiling.

Waiver of Notice

Be advised that BSP laws normally require credit card issuers to provide 90 days’ notice to cardholders before making any changes to how the outstanding balance and fees will be computed. Despite that, in Board Resolution No. 1185, the BSP removed this communication obligation because the imposition of a cap on interest and other financing costs benefited cardholders in any circumstance.

Unconscionable interests, financial charges, penalties, and attorney’s fees

Article 1956. No interest shall be due unless it has been expressly stipulated in writing.³

As mandated by the foregoing provision, payment of monetary interest shall be due only if: (1) there was an express stipulation for the payment of interest; and (2) the agreement for such payment was reduced in writing. Thus, We have held that collection of interest without any stipulation thereof in writing is prohibited by law.⁴

Imposition of unreasonable and unconscionable, which may eventually be interpreted as shocking to the conscience of men, interests, penalties, or otherwise, in a contract is void. The Supreme Court held in the case of Sps. Albos vs. Sps. Embisan, et al.⁵, to wit:

As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.⁶

Even though the Usury Law was suspended on January 1, 1983, it is important to note that unreasonable interest rates may still be found to be unlawful, illegal, and void. This is true even though the parties to a loan agreement have broad discretion to stipulate on any interest rate under Central Bank Circular No. 905 series of 1982.⁷

There is nothing in the circular allows lenders unrestricted authority to raise loan rates to a point at which their debtors would be incarcerated or suffer a hemorrhage of assets.⁸ Thus, it s not an unbridled license for the banks or financial or lending institution to impose unreasonable rates of interests, even though the borrower may have assented thereto.

The Supreme Court has ruled in a number of cases that terms permitting unfair or egregious interests are morally abhorrent, if not unconstitutional. The 5.5% monthly or 66% annual interest on a P500,000 loan and the specified 6 percent monthly or 72 percent annual interest on a P60,000 loan were deemed excessive, inequitable, unjust, and exorbitant in Medel vs. Court of Appeals.⁹

The High Court of the land similarly held in Ruiz vs. Court of Appeals¹⁰ that a monthly interest rate of 3% applied to four distinct loans was excessive. In both cases, interest rates were reduced to 12% per year. The interest rate of 5% per month, or 60% annually compounded, is considerably greater than the 3% per month interest rate imposed in the Ruiz case.

In line with this, the Supreme Court considered the monthly interest rate of 5% to be excessive, unjust, unreasonable, and exorbitant, in violation of morality and the law. Being repugnant to Article 1306, it is null and invalid from the start.

Obligation with a Penal Clause coupled with Interest

It must be emphasized that in an obligation with a penal clause, reference should be made to Article 1226 and 1229 of the Civil Code, to wit:

“Article 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.¹¹

“The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.”¹²

And

“Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”¹²

Thus, while there may be a written agreement as to the collection of interest distinct from penalties, the Court is empowered to reduce the penalty if the same will be determined to be unreasonable. In Macalinao vs BPI,¹³ it ruled that:

“Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable. We held in Chua vs. Timan:¹⁴

“The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets. (Emphasis supplied.)¹⁴

“Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand.

“The same is true with respect to the penalty charge. Notably, under the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:¹⁴

“Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.¹⁴

“In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.¹⁴

“x x . . “

Attorney’s fees

Usually, in the credit card accommodation agreement, therein stipulated is the payment for attorney’s fees in the event collection ensued, in accordance with law, transpired, when the cardholder defaulted in paying his or her obligations.

Nonetheless, such legal fee may still be reduced, despite a written agreement to that effect pegging the percentage, if the rate will also be found to be unreasonable. Hence:

“Finally, the attorney’s fees of 25% of the amount due, with the interest and penalties as of May 16, 1995 of ₱221,560.14 which even exceed the principal debt of ₱179,638.74 are considered exorbitant. While the parties may have agreed to the payment of attorney’s fees, the court has jurisdiction to determine the reasonableness of the sum stipulated. For the court to ignore an express contract for attorney’s fees, it is sufficient that it is unreasonable or unconscionable (Civil Code, Volume 4, 1996, by Arturo M. Tolentino, p. 269).”¹⁵

Remedies

First and this is a no brainer, The simplest approach is pay your payment in full each month. Reduce your expenditure or look into a credit card with a 0% APR that does not charge interest for several months if you are unable to pay your payment in full, in certain instances.

Nonetheless, if you have already defaulted and the bank, or its representatives, or collection agency has already been calling, you may courteously inform them of our current financial situation. In this situation, the credit card companies may offer a viable solution, such as light payment scheme, which will effectively restructure your indebtedness.

You may likewise respectfully request from the credit card companies your current and total obligation as of date and the credit card agreement which you may have signed at the time when you applied for credit accommodation through the issuance of a credit card. With this, you will know the rate of interest and/or penalty (usually these are finance charges and late payment fee) that has been imposed in your credit line, when you use it.

If you feel that that the interest rates have been compounded and lumped up with penalties, finance charges, and late payment fees, you may choose to write your credit card bank relative to your concerns or duly relay your predicament as to the high interest rates and charges, bordering on being unreasonable and unconscionable.

In all of these, you may want to consult a lawyer for proper guidance. If you have a bank officer or consultant friend, it may also be helpful to ask him relative to your dilemma.

Conclusion

Credit cards, when used wisely, can result in enhanced purchasing power that can be utilized for unexpected costs. In a situation when many customers are experiencing a liquidity problem, using credit cards to tide them over is a prudent alternative for mitigating negative income shocks.

The BSP is applauded for taking the effort to defend customers’ interests by encouraging appropriate lending practices. The limit is especially beneficial for our compatriots who may be forced to exchange cash for credit during these difficult times.

The BSP has also vowed to evaluate the processing fee, financing costs, and credit card interest rates every six months. In keeping with this vow, the BSP stated in an official statement that it will continue to adhere to the set restrictions in order to reduce the financial burden on clients.

1. BSP Circular No. 1098[↩]
2. Supra.[↩]
3. Article 1956, Civil Code of the Philippines[↩]
4. Albos vs. Embisan, G.R. No. 210831, November 26, 2014[↩]
5. G.R. No. 210831, November 26, 2014[↩]
6. Ibid.[↩]
7. Castro vs. Tan, G.R. No. 168940, November 24, 2009[↩]
8. Id.[↩]
9. G.R. No. 131622 November 27, 1998[↩]
10. G.R. No. 146942, April 22, 2003[↩]
11. Article 1226, Civil Code of the Philippines[↩]
12. Ibid.[↩][↩]
13. G.R. No. 175490, September 17, 2009[↩]
14. Ibid.[↩][↩][↩][↩][↩]
15. Gabonseng vs. Unibancard Corporation, G.R. No. 160026, December 10, 2007[↩]