Are you one of those shopalcohlic people who buy goodies without having any money to pay for the product and subsequently use the EMI on credit card option to pay over a period of time without understanding how does EMI on credit card work ? If yes, then the next few months are going to render you a poor man – that is because with so many festivities coming up, consumers will be enticed to empty their wallets and you might be making the credit card payments by EMIs if you are short on cash.
Payment of credit cards can be done in two ways – one is pay off the entire principal without paying any interest and the other is to pay a small amount now and carry the rest of the principal to the future by paying interest.
The third option is converting the entire amount into an equated monthly installment for credit cards – much like you pay each month in a home loan. However, you need to first understand how does EMI on credit card work before committing to such a liability.
Let us first try to understand the impact of converting a payment into such EMI purchases on credit cards. If you think the credit card company is allowing you to pay in installments without any extra charge, you might be a bit shocked. Read on to find out.
How does EMI on credit card work
Credit card companies make money by earning interest on late payments that you make. If you are paying off your credit card bills within the due dates, then essentially you are not contributing to their profits. You are not in their good books!
To lure shoppers to take up a repay-in-future-and-pay-interest option, the EMI on credit cards option works great to their benefit. It also comes as a temporary respite for the buyer as he might be facing a cash crunch at the time of the purchase.
EMI on credit cards work much like a home loan or a personal loan – you pay the principal and interest each month and clear off your debt over a period of time. Put it simply, that is how EMIs on credit cards work.
Almost all the credit card companies offer two variants of the EMIs – one is a free zero interest rate EMI and the other is a low interest rate EMI. The word low is used here as it is lower than the late payment interest rates that you would have paid normally in case of the non EMI option.
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So if you look at it, the bank is riding on your inability to pay now to be converted into future dated payments with a slightly lower interest rate. If the credit card companies do not allow for this, then you might actually default and not pay them any interest, leave alone the principal. So it works good for them as well.
The zero interest rate EMI is a no brainer – if you purchased something of say Rs 24,000, then this gets converted into an EMI of Rs 2,000 each month. You do not have to pay anything extra here and the credit card company does not earn anything out of you. Hence, such offers are free and far between.
The low interest rate EMI option calls for interest rate in the range of 1.25%-1.99% per month which in most cases is lower than the normal rate charged on a credit card late payment.
What you must note is that banks will levy processing fees before you can use any of these options. Also, if you want to prepay, then you might end up paying a pre payment charge as well.
Talking about processing fees, you must note that this is bundled with the principal and service tax is levied on the total amount and that gets converted into EMIs – that is awful – paying EMIs on processing fee + service tax!!
Once you take the EMI route, your credit card limit is automatically reduced by the amount of principal outstanding. As and when you keep paying the EMI, the debt reduces. But till the time you bring this down to zero, be aware of the fact that you cannot shop upto the allowed original credit card limit any more.
Another thing to take a note is that once you convert into an EMI, many banks will ask you to pay this EMI as a minimum payment due each month. So while the EMI option was meant to put the consumer at ease with small payments over a period of time, that payment now has a bloated minimum amount ! Seriously crazy.
Look at this note from ICCI Bank –
We wish to inform you that with effect from September 24, 2012, the calculation method for Minimum Amount Due (MAD) payable on your ICICI Bank EMI Credit Card has been revised, MAD shall now be 5% of the outstanding amount.
In case of any repayment through EMI, the EMI amount due during the statement period will be added to the MAD.
Other points to be aware of
This facility might not be always available round the year.
Also, purchases from select merchants might only qualify for such a scheme.
If you think you are going to default on payment of your credit card dues, then it is wiser to opt for paying via the EMIs on credit card. A default will not look good on your credit score and will also come at a higher rate of interest.
Converting into an EMI option is also valid on purchases above a limit. For example, ICICI Bank will convert minimum purchases of Rs 3000 into EMIs of 3,6,9 or 12 months. And not just that, if you want to go via net banking for EMI conversion, then purchases greater than Rs 5000 can only qualify.
Last Word on how does EMI on credit card work
If you are caught in the rut of paying via EMIs on credit cards then you must do some serious introspection on how you are conducting your lifestyle. Consumers fall for such traps when they shop for consumer durables like laptops, TVs and other gizmos that might not really be mandatory for them to buy. One needs to understand how to control lifestyle expenses and differentiate between needs and wants.
Over to you now – have you been bitten by this bug already and did you learn anything new on how does EMI on credit card work ?