The latest entrant in the credit card market, IDFC First Bank, has offered the lowest interest among all credit cards: as low as 9 percent! In a recent interaction with Moneycontrol (before the bank’s silent period began due to its impending financial results), the bank’s managing director and chief executive officer, V. Vaidyanathan said that IDFC First Bank is the first bank in India to introduce the dynamic interest rate system for its credit card customers. “The main thing is that we are keen to expand the market. For 30 years, revolver rates have been near 40 percent. By having fair rates, we think customers will appreciate us. Feature for feature, we’ve put out the best offer, on rewards, interest rates, fees, or design,” he said.
Put simply, the interest rates charged on your credit card will change over time, depending on your credit behavior. The interest rate will also differ from customer to customer.
Here is everything you need to know on how the dynamic interest rates would work on the IDFC First Credit Card.
What is it about?
IDFC First Bank’s credit card will come with interest rates to the tune of 9-36 percent. Typically, banks fix credit card interest rates depending on the type of credit card. Once this rate is fixed, it is common for all users of that category. The prevalent interest rate on other cards is around 40 percent a year.
The bank will comb the application thoroughly and do a bit of background check to determine how much interest the applicant deserves. For instance, it will look at your credit score. “We will also look at the customer’s banking experience with us,” says V. Vaidyanathan. This means, the bank will look at the fixed deposits you hold with it, your loans (within and also elsewhere, through your credit report), how much balance you have been maintaining in your account and so on.
A credit card’s dynamic interest rate pricing works pretty much the same way as floating rate home loan schemes. Higher the credit score, the lower is the risk premium. “It’s high time such a product is offered. In the US and other developed countries, such credit cards are popular and the rates are lower. This feature from IDFC First Bank can change the way credit cards in India work,” says Raj Khosla, founder and MD of MyMoneyMantra.com.
Same card, different rates
Dynamic interest rates also mean that the two people using the same credit card will have different rates. Vaidyanathan says that customers wouldn’t know what interest rates they would get at the time of making an application. But once the application is approved, the bank will inform the rate to the customer upfront.
Parijat Garg, a credit scoring expert says, “The advantage of dynamic interest rates on the same credit card is that because of the credit profile, you are able to get the better terms on a credit card itself, which was otherwise not possible due to standardised products available in the market.”
Ashish Singhal, Managing Director, Experian Credit Information Company of India says, “The bank may decide on reviewing interest rates at a periodic frequency, which is communicated to the customer transparently and is convenient for the customer.”
“Over time, we may evaluate the credit scores and interest rates on credit cards issued. We may look at them after one year on evaluating the customer’s credit profile,” says Vaidyanathan.
In simple words, if your credit behavior worsens over time, your credit card interest rate may go up.
A genuine help or a marketing gimmick?
Since dynamic pricing rewards good behavior, it helps. Experts say that instead of taking personal loans during an emergency situation, you may as well revolve your credit here, if your interest rate is indeed low. This also keeps you away from loan sharks or digital lending apps that charge around 14 to 30 percent annually.
“At present, many credit cardholders apply for personal loans to repay credit card dues if they are unable to repay the outstanding dues, as personal loan interest rates (10 percent to 15 percent) are lower as compared to credit card which charges interest around 36-40 percent annually,” says Garg.
Critics say that this is a gimmick. “It’s a smart marketing gimmick. The bank is highlighting the interest rate as it wants to launch the credit card in the market,” says Aparna Ramachandra, Founder Director of rectifycredit.com. She adds, “when you get the products (large purchases) to convert at zero percent interest rate from existing banks then why you even need to pay nine percent interest for revolving the outstanding credit.
Besides, low interest rates are available to those with good credit scores and they either rarely borrow or avoid loans, or in the case of their credit cards, pay their bills on time. Getting such credit card users may also be a challenge since they would already be holding multiple credit cards for many years.
Experts like Garg believe, however, that dynamic pricing is the start of a good trend. “Other banks will be watching,” he says. But reducing rates big time will not happen as “that could impact the profitability of the cards business,” says Singhal.
Should you apply for IDFC First Credit Card?
Low interest rate on your credit card is just one of the features you should consider when applying for a new credit card. Remember, you can only use this feature if and when you decide to revolve credit. And if you’re disciplined with your monthly credit card bills, then it’s just like any other credit card. Besides, as Singhal says, you should only revolve credit when faced with an emergency.