Supreme Court Cuts Credit Card Interest to 2% Monthly as Unconscionable

The Supreme Court has ruled that a 3% monthly interest rate plus a 3% monthly penalty charge on credit card obligations—amounting to 72% per annum—is unconscionable and must be reduced. In Macalinao v. Bank of the Philippine Islands (G.R. No. 175490, September 17, 2009), the Court cut the combined rate to 2% per month or 24% per annum, providing important guidance on how Philippine courts treat excessive interest stipulations in credit card agreements.

The Facts of the Case

Ileana Macalinao was a BPI Mastercard cardholder who defaulted on her payments. BPI sent a demand letter for PhP 141,518.34, then filed a collection suit before the Metropolitan Trial Court (MeTC) of Makati City. The credit card agreement stipulated a 3% monthly interest rate plus an additional 3% monthly penalty charge.

When Macalinao and her husband failed to file an answer despite proper service of summons, the MeTC rendered judgment under Section 6 of the Revised Rule on Summary Procedure, ordering payment of the amount due plus 2% monthly interest and penalty. On appeal, the Court of Appeals (CA) modified the ruling, increasing the rate back to 3% per month based on the credit card agreement. Macalinao appealed to the Supreme Court.

The Issue

The central issue was whether the stipulated interest rate and penalty charge of 3% per month each—totaling 36% per annum for interest alone—were unconscionable and should be equitably reduced.

The Ruling

The Supreme Court ruled partly in favor of Macalinao, reducing the combined interest and penalty rate to 2% per month or 24% per annum.

The Court cited its earlier ruling in Chua v. Timan (G.R. No. 170452, August 13, 2008), which held that stipulated interest rates of 3% per month and higher are "excessive, iniquitous, unconscionable and exorbitant" and are void for being contrary to morals. The Court emphasized that while the Bangko Sentral ng Pilipinas' Circular No. 905-82 removed interest rate ceilings, this did not grant lenders "carte blanche authority" to impose rates that would enslave borrowers.

Applying Article 1229 of the Civil Code, the Court explained that judges may equitably reduce penalties that are iniquitous or unconscionable. The Court noted that Macalinao had made partial payments, and the stipulated penalty charge of 3% monthly on top of regular interest was indeed iniquitous. The Court reduced the interest rate from 1.5% to 1% monthly and the penalty charge from 1.5% to 1% monthly, for a total of 2% per month.

No Dismissal or Remand

The Court also rejected Macalinao's argument that the case should be dismissed or remanded for further evidence. Since summons was properly served and she failed to answer, judgment on the pleadings was proper under Section 6 of the Revised Rule on Summary Procedure. The Court noted that Macalinao herself admitted the existence of her obligation, and a dismissal would cause injustice to BPI.

Practical Takeaways

• Courts may reduce unconscionable interest rates. Stipulated rates of 3% per month or higher are presumptively excessive and may be reduced by courts under Article 1229 of the Civil Code.
• Credit card agreements are contracts of adhesion but not automatically void. They are binding, but courts will scrutinize unconscionable terms.
• Failure to answer a summons has consequences. Under the Revised Rule on Summary Procedure, a defendant who fails to answer may face judgment based on the complaint and the plaintiff's evidence.
• Partial payments matter. Courts consider whether a debtor made partial payments when determining whether penalty charges are iniquitous.
• The 2% monthly benchmark. Following this ruling, 2% per month (24% per annum) for combined interest and penalty has become a common equitable rate in credit card collection cases.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.