The simplest tool for a short-term debt coming to your rescue when one wants to spend beyond their means. To put it simply, it allows one to spend first and pay later. With this comes the goodness of cashless transactions but this facility is also available in Debit Cards, wallet payments, online transfers etc. In all of these spending tools, one needs to have the amount they wish to spend in their account. Other perks that include the benefit of having a credit card are cash back, discounts and reward points.
The dues over a credit card can be paid off in various ways; it could either be by paying off the entire amount, paying the minimum amount, paying interest on the rest or converting the entire or partial payment into an Equated Monthly Installment (EMI).
If one spends more than what they pay for at one go, EMIs can help get the better of it. Credit Card EMIs, unlike Personal Loans can be availed anytime if one has the EMI facility available on their card and sufficient balance to support it.
Benefits of having Credit Card EMIs:
- Repayment is easily managed during money crunch
Credit Card increases the purchasing power at the time when one’s financial schedule is tight and yet they’re pressed to purchase certain things. It allows an interest-free-credit-period, which ranges between 20 to 52 days. If one falls short of liquid funds to repay within the interest-free period, they can convert the due amount into EMIs with a tenure ranging from 3 to 24 months. EMIs can help one distribute the repayment load over several months and hence save them from the exorbitant interest charged upon crossing the interest-free period.
- Low Interest
On failing to clear off the outstanding amount by the end of the interest-free period, one would be charged with an interest rate of 1.5% to 3.5% per month. On the other hand, if they convert the outstanding amount into EMIs, the interest would be at 1% to 1.5% per month, which is comparatively low. Thus, converting the Credit Card dues into EMIs will reduce financial burden because the interest outgo will then be cut down.
- Can improve the Credit Score
Non-payment of Credit Card dues on time can lead to lowering of the Credit Score. EMI payment gives one more time to arrange for funds, increasing the potential to pay on time. If one pays for their EMIs on time, their Credit Score will improve.
- Approval for loan is no longer required
The EMI facility on a Credit Card can be used when one checks that the feature is available with the card. One can then request the Credit Card service provider to convert the outstanding amount into EMIs. Once it is converted to EMIs, they can make payment on the scheduled dates for it doesn’t require an approval like other loan products.
In case the Credit Card doesn’t have the EMI facility, one can transfer their dues to another Credit Card that has the feature available.
- Attractive Online Offers
Most online retailers tie up with Credit Card companies to offer a discount on processing and interest charges on purchase of goods and services through EMIs. These offers are commonly available on electronic goods, watches, shoes and more.
Things To Keep In Mind
Before we convert an amount into EMI, we need to check the processing charges that would be levied on it, while some card companies do not charge a processing fee at all.
Before purchasing an item, one should check if the EMI option is available or not since this feature does not cover all transactions.
Credit Card companies usually do not allow prepayment of EMIs. Prepayment might even attract a penalty, so one should be aware of such charges.
If one has an outstanding amount on their Credit Card, they can get it converted into EMI for a suitable tenure to relieve themselves from the financial burden.
A product that comes with its perks also has certain disadvantages that can turn out to be expensive later on. Lets take credit cards, for instance. While the use of credit cards as a mode of payment is known to be well, most people don't realize the other side of using it, especially if they do not follow its financial discipline.
If one spends beyond their repaying capacity, they’re a chance that they’ll be charged with prohibitively high interest rates - in the range of 36 per cent to 45 per cent - if the outstanding credit card bill is not paid. One can then opt for the equated monthly installment (EMI) route that comes at a lower rate of interest.
But how hassle-free and attractive this EMI option really is? Let's find out:
- Does the credit card I’m using have the EMI option?
Though it may appear to be basic, it is still important to know whether the card one is using, has an EMI facility. For example, banks such as ICICI Bank, Standard Chartered Bank and HDFC Bank offer EMI cards, they permit an outstanding up to 5 lakh rupees for EMI facilities and the rate of interest charged is in the range of 16 to 22 per cent.
However, one should check with their card-issuing bank whether the credit card comes with an EMI option. If the credit card does not offer an EMI facility, the customer has to either go for a personal loan or transfer the balance to some other credit card to ensure a timely repayment of the outstanding amount. Failing to do so would result in a huge burden of high interest rates that would be applicable on the credit card.
- Impact on the credit limit
Even if the credit card offers EMI facility to repay the outstanding amount, there may be more factors, which need to be taken into account. The moment one opts for an EMI repayment arrangement, the credit limit stands reduced to the extent of principal outstanding. However, as you keep repaying through EMIs, the credit limit is freed. To put it simply, opting for EMI can block one’s spending capacity in the subsequent months.
This can be a big factor if one is dependent on their credit card to either fund their future expenses or use it as a payment mechanism.
- Processing fee
Another factor to look for is the one-time processing fee that banks charge to initiate an EMI option. This fee can be charged upfront and be added to the costs that need to be paid by the cardholder. The fee is generally expressed as a percentage of the loan availed on the EMI option and can generally be capped at a fixed sum; let’s say Rs. 5000. One can negotiate this amount if they’re a loyal customer to the bank. The bank may choose to waive it.
Some banks offer an insurance option to the cardholder. An extra charge for the premium requires insurance companies to pay the outstanding principal in case of an eventuality. This ensures payment of an outstanding amount to the bank and is a win-win situation for all three - the cardholder, the bank and the insurance company. Besides this one can also opt for an EMI option that can help an individual save their credit score from falling.
The three factors given above represent the advantages of paying a credit card bill through the EMI route. But is this a profitable way of repaying the credit card bill?
The answer is no, one must think of an EMI option only if they're on the verge of defaulting a payment. This saves the CIBIL score from going down.
Having said that, the EMI option should be used sparingly because it can become a burden to finance in the long run. Too many arrangements would impact the credit score adversely and one is better off using credit cards when the need is essential and purpose is immediate.