Will Credit Card Usage for Rent and Tuition Fees Payment Banned?

A credit card is a physical payment card facilitating you to buy goods or services without using money. You can use the pre-approved credit limit given to you to make purchases, shopping and other transactions. You receive a bill every month for what you have used your credit card. You need to pay the credit card bill within your billing cycle before due date. Credit cards not only offer you emergency funds but also give you finance for big purchases & protect you from fraud. Credit cards offer following benefits,

• You get free credit period up to a 50 days
• Give reward points, cash back and miles
• Protect you against fraud
• Your purchasing power increases
• Help in building credit history and improve credit score

The main idea behind the introduction of Credit Card in the Indian economy was to use it for carrying out verified transactions between customers and merchants (P2M) such as payment of shopping bills, merchant payments, etc.

As per the RBI data of February 2024, the credit card spending has shown a significant 26% annual growth and has reached Rs.1.50 lakh crores. It has also been seen that most of the credit card spending done is towards big ticket transactions like payment of rent, tuition fee, society maintenance, etc., which is not a transaction between customers and merchant (P2M) but is a transacton between two individuals (P2P).

Recently, the Reserve Bank of India (RBI) has shown its concern and uncomfortability with the usage of credit cards for P2P payments like rent and tuition fees.

How Credit Cards are Used to Pay Rents and Tuition Fees?

Some fintechs such as Red Girraffe, CRED, No Broker, ePayRent, MyGate, PayZapp, Paytm, Housing.com, Magicbricks, Paymatrix, 99acres, Phonepe, Freecharge, Mobikwik, etc. have introduced a platform to provide their customers a service which allows individuals to use credit cards to make payments to other individuals (P2P). For availing these services from the fintech, you need to get yourself registered with the fintech by providing your personal details and also the beneficiary's details. For providing such services, the fintechs charge a processing fee ranging from 1% to 3% along with GST on the total spending.

How Rent is Paid using Credit Card?

Outlined below is the stepwise process to explain you how is credit card used to make rent payment,

• Step 1: Register yourself with the fintech by providing your personal details and your account will be created on its platform
• Step 2: Link your credit card information with your account
• Step 3: Provide rent details such as rent amount, landlord's bank account details, the due date, etc.
• Step 4: These details will be verified by the fintech
• Step 5: After verification & approval from the fintech, you can use your credit card to make the rent payment
• Step 6: The rent amount will be collected via the regulated payment aggregator
• Step 7: This collected amount is then transferred to the escrow bank account of the fintech
• Step 8: Now the fintech will transfer the rent amount from its escrow account to the landlord's bank account through a fund transfer such as IMPS, NEFT or RTGS

Benefits in Using Credit Card for Rent Payment

1. Free Credit Period: You can get up to a 45-60 day credit period, providing a financial buffer as the rent amount will remain in your savings account. How much credit period you will get will depend upon the number of days between the rent payment date and the due date for credit card bill payment.
2. Helpful in Annual Fee Waiver: Banks usually waive the annual fee of credit card on spending a particular amount, say Rs.2 lakh, in the previous year. Rent payment involves spending of a big amount via credit card, so it contributes a lot towards annual spending via credit card without making any bonafide transaction.
3. Reward Points Earning: You will earn more an more reward points, if you spend more via credit card. Rent payment being big ticket transaction will generate more reward points.
4. Ease in Managing Expenses: Using an credit card to pay your rent makes it easy to manage all your expenses in one place.
5. Rent Receipts: You get rent receipts and digital proof for rent payments every month.
6. Cash Bank Opportunities : More cash back will be given to you on making higher credit card usage.
7. Building Credit History: Regular rent payment will contribute positively to your credit history and will improve credit score. More usage of credit card and timely payment of credit card bills will build your credit history.
8. Convenience: Paying rent through a credit card is very convenient as you need not access to a physical cheque or do not have to make an automatic bank transfer.
9. Timely Payment: You can make timely payment of rent without delay, even if there is a lack of liquidity.

The RBI has shown its concerns towards payment of rent and tuition fee via credit card for P2P transaction. It states if credit card is to be used for rent or tuition fees payment, wherein the funds are routed through an escrow account, the recipient must have a merchant payment account to receive rent or other payments through a credit card. In that case, it will be a P2M transaction for credit card payment.

What Steps the Banks Have Taken to Discourage the Usage of Credit Card for Rent Payment?

After RBI's concerns, some banks have also started taking steps to discourage the usage of credit card for rent payments and other P2P transactions. Some banks have stopped offering reward points for rent transactions. Some have excluded rent transactions for calculating the annual spending amount to get credit card annual fee waiver. Many banks have started imposing a processing fee for rent transactions done through credit card.