Paying rent with credit cards? Think again !


In today’s Finshots, we see why ICICI Bank’s decision to impose additional fees on “credit card rent payments” could be a sign of things to come

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The story

Have you ever used apps like Cred, PayTm or NoBroker to pay your rent?

If so, you probably used your credit card to complete the transaction.

But here’s the thing – If you were using an ICICI Bank credit card, you may need to rethink your strategy soon. Because on October 20, they will ask you to pay 1% fee on all rents.

But why is this happening now? Doesn’t ICICI Bank already earn money when you pay rent?

They do. But there are a few caveats involved.

So let’s take things from the top, using Cred as an example.

Now if you used Cred to pay the rent they would charge you somewhere 1–1.5% to facilitate this transaction. And I know what you’re thinking – Why would anyone pay extra just to pay the rent – Why not just pay it straight and be done with it?

It’s fast, clean, and something we’ve been doing for ages.

But… Cred fees might not really be such a bad thing. For starters, banks offer cash back and rewards when you use their credit cards. It is a way for them to encourage you to take out this short-term loan or credit. Sometimes the cashback can reach 3%. Along with that, you can also add rewards, like Cred coins. You can then use these coins to buy discounted products – snacks, headphones, pillows or sneakers.

There is also the fact that credit is “credit”. Depending on your billing cycle, you may be eligible to borrow money interest-free for 18 to 45 days.

So, if you are short on cash, this feature can come in extremely handy.

Also, credit cards usually waive their annual fees if you spend a certain amount each year. And because rent payments are high-value, recurring transactions, people can easily exceed those spending goals. Put it all together and you could argue that the 1-1.5% the fees can be worth it.

In all cases, Cred charges you these costs, but the company doesn’t actually pocket all that money. Of course, this may appear as “income” on their financial statements. But they have to pass it on to many intermediaries in the payments ecosystem. Your bank gets its share. Payment gateways also receive a small share. And Cred pockets the difference, if there’s anything left.

So yes, ICICI Bank already has a gateway to earn money.

But as we’ve already noted, there are caveats. You see, a credit card was originally designed to entice consumers to spend more. And it was primarily designed for consumers to transact with merchants. So if I were selling electronics on my storefront, I could potentially convince you to buy an iPhone by reminding you that you have a credit card. Telling yourself that you can spend a little extra money, even if you’re short on cash right now.

But when you pay rent with a credit card, you are no longer dealing with a merchant, you are sending money to your landlord. It’s as good as using your credit card for a cash advance.

And banks are not very comfortable with cash advances. If you use your credit card at an ATM and withdraw cash, you know it incurs a 3% charge. And there is no grace period or reward points. Interest is charged when you withdraw the money. Now the banks are adding these restrictions because they think you are desperate. It’s almost like a personal loan and they’re reluctant to let you use your credit card that way.

However, when you pay rent on Cred with a credit card, you’re still doing the same thing, in a roundabout way, without having to deal with all the restrictions.

Let me explain. Imagine that you wanted to exploit this flaw. You just pretend you have an owner or have a friend pretend to be an owner. You then make a payment to that friend, label it “rent,” and send money to their account using your credit card. They could then use their debit card at the ATM, withdraw the money and give it directly to you.

You see, you used a credit card for an immediate, interest-free cash withdrawal!

It’s a cash advance without all the pesky restrictions.

And most platforms don’t even ask you for a rental agreement. So it’s very easy to get away with it.

But it seems that the banks have finally realized the real risks associated with this type of payment. ICICI Bank is perhaps only the first among many. And if it becomes the norm, paying “rent by credit card” may become a thing of the past.

It is possible that the additional costs are no longer worth it.

Until there…

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