Credit Card EMIs

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EMI is a common household term today, as more and more people are availing different kinds of credits to meet their financial needs. The same is applicable to outstanding amounts in credit card dues which the customer may find difficult to pay in one go. Is the EMI facility on credit card payments a good option or does it come with strings attached? Let's first understand what EMIs in credit cards are.

When you make a purchase using your credit card, you can make its payment by any of the following ways:

• Make the full payment of the card on the due date
• Make a part payment and pay interest on the unpaid amount till it is repaid
• Pay the outstanding amount in EMI

The third option is when the amount can be paid back to the credit card company in equal parts. EMI in credit card dues thus works like a loan, wherein you pay off the outstanding amount equally during the pre-decided tenure.

The card issuer usually specifies the conditions that only specific purchases of certain amount from select stores would be eligible to avail the EMI benefit. While this option is generally available at the time of making purchases, some banks offer the facility of opting for EMI option even at a later date or on outstanding dues on the card . A credit card holder must ensure at the outset that the issuer of the card has given an option to avail this facility as it is not available across all kinds of cards.

Forms of EMI payment:

• Most EMI options on credit cards carry an interest rate. This interest rate is generally lower than the normal interest rate on the credit card. The EMI is made up of two variable components- principal amount and interest rate. Assume you make a purchase for Rs. 15,000 and opt for EMI option at a monthly rate of 1.5% over 6 months. The total outstanding amount is first calculated, which is then broken up into equal payments over 6 months, comprising of both principal and interest components. The component of interest amount is higher in initial years and decreases over the years. The component of principal amount is lower in initial years and increases over the years.

• You can avail an interest-free EMI option on certain purchases. So if the purchase amount is Rs.15,000 and you opt for a 6 month EMI, then this will translate into six monthly payments of Rs. 2,500 each. However, this could be a short-duration promotional offer where there are no charges at all. It can also be applicable if you are transacting at a retail outlet that has a tie-up with the bank. Further, in this case, you must evaluate to check if the discount on the product is taken away when you opt for EMI option. For instance, the product worth Rs.15,000 may be available for Rs. 13,000 without the EMI option.

In both the above cases, the customer is charged a one-time processing fee which is a percentage based on the transaction amount. This percentage varies from bank to bank.

Options to mitigate the EMI Risk

The credit card companies have many shrewd plans to extract maximum interest from the unsuspecting customers. They design products in such a way that they always stand to gain. Some banks do offer Insurance on EMI so that in case of an emergency the insurance takes care of your minimum dues for certain period but not the entire amount. However, you'll have to purchase insurance upfront with a premium. Thus, the options to avoid paying higher interest when taking EMI facility from credit cards are limited.

Drawbacks of availing EMI option on Credit card dues

• If you opt for an EMI facility, the EMI amount will get reflected on your monthly credit card bills along with your other dues. If you fail to pay your credit card dues in any month, you will be charged a hefty interest of anywhere between 24%-36% for non-payment. This interest will be charged on your EMI amount as well, which already carries the basic interest of the EMI facility, causing a double whammy.

The customer gets an impression that the amount being repaid is being treated as a separate loan and once the EMI starts, the entire card limit can be used again. But it is not true as till the total amount is paid, one can only use the remaining limit from the credit card. If you want to repay the entire outstanding at one go, there is a prepayment penalty. Most banks will charge you 1%-5% on the outstanding. Moreover, if you forget to pay EMIs, there will be an extra interest cost involved.

Therefore the need for discipline in all kinds of spending through credit cards is essential for smart financial management of personal expenses. Any big ticket buy through credit card without sufficient funds to make the payment in one go can result in huge interest burden subsequently. Such offers need to be carefully evaluated on a case by case basis to see if there are any savings by the cardholder before taking it up.

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