look news india
Crores of employed and professional people living in rented houses in metro cities to Tier-2 and Tier-3 cities pay house rent every month. In the last few years, the trend of paying house rent through credit cards through third-party apps and fintech platforms has increased rapidly. People swipe the card to deal with cash crunch at the end of the month, get interest-free credit period of 45 to 50 days and earn reward points or cashback. But due to changes in financial rules and strict policies of banks, this facility is no longer as beneficial as before. If you also make rent payment through credit card, then five big mistakes can spoil your financial health.
1. Ignoring heavy processing fees and 18% GST
Earlier, paying rent through credit card was almost free or at nominal charges, but now most of the major banks like HDFC, ICICI, SBI Card and Axis Bank have started charging additional processing charge of 1% to 2% on rent transactions. Apart from this, third-party payment apps (like Cred, Paytm, PhonePe, NoBroker) also charge a convenience charge of 1% to 1.5%. A separate 18% GST is added on this entire fee. For example, if your monthly rent is ₹30,000, you may have to pay an extra ₹400 to ₹600 per month just in fees, which amounts to a flat loss of ₹5,000 to ₹7,000 per year.
2. Cultivating the False Illusion of Reward Points and Milestone Benefits
Many consumers pay fares with credit cards in the hope that this will earn them big rewards points, air miles or milestones like annual fee waiver. The reality is that almost all the top banks have amended their terms and conditions and excluded rent payments from the rewards catalog and milestone calculations. This simply means that you will have to pay a hefty processing fee, but the reward points you get in return will be zero or very limited. Paying the fare without checking the rules for changing your card proves to be a deal of financial loss.
3. Credit Utilization Ratio (CUR) increasing and CIBIL score falling
House rent is a major part of any family’s monthly budget. If your credit card limit is ₹1,00,000 and you are paying rent of ₹35,000 every month through the card, then just with this one transaction your credit utilization ratio crosses 35%. According to the standards of credit bureaus (like CIBIL and Experian), using more than 30% of the credit limit is considered risky. This brings down the credit score, which may make it difficult to get a home loan or personal loan in the future and may face higher interest rates.
4. Not being able to pay the bill in full on time and getting stuck in debt trap
Using a credit card is fine for immediate liquidity, but if in a month you pay only the ‘minimum due’ instead of paying the bill in full, the rent amount starts accruing huge compound interest at the rate of 36% to 42% per annum. House rent is a recurring expense, which has to be paid again next month. In such a situation, the last month’s dues and the new rent together push the consumer into a deep debt trap, from which it becomes very difficult to get out.
5. Risk of fraud in ITR and Tax Rebate (HRA) claims
The Income Tax Department now keeps a close watch on high value financial transactions. If a person transfers money from credit card to the account of his parents, relative or spouse by creating a fake rent agreement to save tax, then it can come under the scrutiny of the Income Tax Department. If the annual rent is more than ₹ 1 lakh then it is mandatory to provide PAN card of the landlord. Every digital transfer made through the card is recorded in the banks and Annual Information Statement (AIS). Failure to have original rent receipt and valid bank trail may result in facing income tax notice.