Credit Card EMIs can ease your financial burden, as instead of paying the entire amount upfront, you can repay the dues in installments over a few months. You can convert your full or partial bill into EMIs or make big-ticket purchases without burning a hole in your pocket. Though this is convenient, there are certain factors that you must consider before converting your purchases into EMIs.
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(i) Compare the fees and charges: EMIs on credit cards are subject to certain charges, such as the interest rate, processing fee, prepayment / foreclosure charges, etc. While the processing fee is a one-time charge that may range from 0-3 percent of the amount, foreclosure / prepayment charges are applicable in case you wish to close your EMIs fully or partially before the loan tenure. Interest is also applicable on EMIs, which varies from one card issuer to another. However, with no-cost EMIs, these charges are either waived or adjusted in the form of a discount, which ultimately makes the total EMI equivalent to the product’s price.
If you have multiple cards, and you wish to make a new purchase, you must always compare the rates across all the cards you own and choose a card that offers the lowest rates. Additionally, you can also check if any of the cards offer a special discount or no-cost EMI with the merchant.
(ii) Choose the right tenure: Usually, credit card issuers offer a lower interest rate on a longer tenure. However, before opting for a longer tenure, you must first calculate the quantum of interest you will end up paying over that period.
For instance, let’s assume that you avail of an EMI on Rs.10,000 with your credit card. Here, the interest rate for a 3-month tenure is 20 percent, whereas for 12 months it is 18 percent. If you choose the lower rate, that is 18 percent, to be paid over a period of 12 months, then you will end up paying more, as below:
Interest accrued on 3 months plan: Rs. 493.15 [10,000*(20%/365)*90]
Interest accrued on 12 months plan: Rs. 1,800 [10,000*(18%/365)*365]
Thus, you must choose the tenure wisely, as it does not necessarily mean that a lower interest rate on a longer tenure will help you save money.
(iii) Consider the Loss of rewards / discounts: Generally, credit card issuers do not offer any reward points or additional discounts on transactions converted to EMIs. In such cases, you must always consider the value of reward points / cashback lost, or the discount you would have got if you did not opt for EMI conversion. In case you can save better via the offers applicable on non-EMI purchases, you should reconsider the EMI option.
On the other hand, some credit cards such as HDFC Bank Millennia Credit Card, or Standard Chartered EaseMyTrip Credit Card, etc., do offer cashback / rewards even when you convert your transactions into EMIs. Therefore, if you own multiple credit cards, you should put your EMIs on cards that continue to offer other rewards and benefits along with EMI transactions.
(iv) Blocked credit limit: You must keep in mind that as and when you opt for a credit card EMI, the total transaction amount is deducted from your credit limit, not just the EMI amount. However, as you pay the EMIs, the amount gets added to your available limit. While the limit is replenished as you service the EMIs, the available credit limit is significantly lowered at the time of purchase, which means you will have a lower credit limit for future purchases.
Undoubtedly, among a host of benefits offered, EMIs are one of the most attractive features offered on a credit card. When you do not have enough funds at hand, opting for EMIs is always the better option. As the monthly payments get manageable with EMIs, chances of default reduce.
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However, it is advisable that you opt for EMIs keeping in view the factors mentioned above as these will help you maximize the benefits and save more. Additionally, even after availing of the EMIs, you should always ensure that you use your credit card as per your financial abilities, so that you are able to pay your bills on time and avoid hefty finance charges and penalties which can lead to a debt spiral.
