Case Studies

“Swipe Your Credit Card Tears Away: The Case of Reduced Credit Card Interest Rate and Penalty Charge”

It has been a common conversation among credit card holders the harsh interest rate as well as the penalty charge being imposed against them by credit card companies. With the recent ruling of the Supreme Court in the case entitled "Ilenea Dr. Macalinao, petitioner, vs. Bank of Philippine Islands, respondent", docketed as G.R. No. 174590 and promulgated on September 17, 2009, it is now settled that an imposition by credit companies of 3% interest rate per month and a 3% penalty charge per month is invalid for being unconscionable or "unreasonably excessive." This is the gist of the Supreme Court decision:

"In its Complaint, respondent BPI originally imposed the interest and penalty charges at the rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent BPI.

In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest. On the other hand, respondent BPI asserts that said interest rate and penalty charge are reasonable as the same are based on the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card.

We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum.

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:

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.)

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:

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.

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.

In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI, as indicated in her Billing Statements. Further, the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable.

Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1% monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.

Once again, the Supreme Court has come to the rescue of ordinary people suffering from unreasonable imposition of credit card companies. This Supreme Court ruling is a welcome respite to credit card holders being hounded by over eager collection agencies. It should be noted that while the Supreme Court have considered the partial payments made by Macalinao in the above cited case as one of the reason for the reduction of the penalty under Article 1229 of the New Civil Code, it decided that the said 3% penalty imposed is also unconscionable. We could impliedly deduce from the said ruling that even without any partial payments made by Macalinao, the penalty charge of 3% could still be struck down for being excessive.

However, this Supreme Court should be taken with caution, as it does not give license to credit card holders not to pay the credit card companies of their obligation. Under this ruling, present credit card holders are entitled to question the billing of credit card companies if the interest rate and penalty charge per month against them is 3% or more. Credit card holders could not take the law on their own hand by refusing payment of their obligation. This is not the essence of the Supreme Court decision under discussion. They should first inform in writing the credit card company of their protest against the invalid billing pursuant to the Supreme Court case of Macalinao vs. BPI and request for a correct computation. Better yet, credit card holders should seek the advice of a lawyer for a better appreciation of the facts and the law applicable in their particular case.