How does EMI on credit card work ?

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.

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.

How does EMI on credit card work

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 ?

Author: Radhey Sharma

Radhey is a Certified Financial Planner and an expert in the disciplines of insurance, retirement, investments and tax. His hobbies include gardening, traveling and reading self development books. The information contained on this blog is general advice and may or may not be suitable to the reader. Kindly take professional help before you apply what you read.

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14 Comments

  1. Nice article,

    Two important aspect very well mentioned. That is impact on “minimum due amount” for every billing cycle & “reduce in your credit limit”.
    Once must have to understand pros & cons before opting for EMI options.

    Post a Reply
    • Yeah Jatin, you are very right. Most of the people never understand these 2 points. Thanks for pointing them out again.

      Post a Reply
  2. Very informative and detailed article. I think we should pay the entire amount before due date and do not opt for EMI. We should make use of the bill-cycle and shop accordingly. For.eg. If your bill cycle is 5th every month then we should start buying on 6th. That way you get enough time. Why buy when you cannot pay……

    Post a Reply
    • Yeah that is the right approach, pay before every due date and get over with it.

      Post a Reply
  3. hi,
    I booked a ticket of about 19412 INR(including some charges which were above 1000 INR ‘coz I chose EMI of 6 months) using ICICI platinum chip credit card. My credit limit is 20000 INR. My EMIs are about 3500 INR. It seems that except the next due date(by which, of course, I will pay the first EMI), I can pay the rest of the amount by the next dyue date. But I need some suggestions whether I can do it or not? Please I need some advice about the pros and cons related to this buying of mine. Am I in some sort of trouble? :(

    Post a Reply
    • What is not clear is whether you are talking specifically about your EMIs here or any dues other than EMIs ? If it is EMIs, then you have to pay by the date. You can pay a minimum due on your credit card and carry over the rest but then you will need to pay charges. Long story short – clear all your credit card dues.

      Post a Reply
  4. Its a very informative article… good work. But i am still confused.
    I have a HDFC emv platinum credit card. My credit limit is 30k. I already have a product of 8.5k on emi of 12 months. So suppose my available credit limit is 23k, then can i make another purchase of 36k( a laptop ) on 6 months emi (6k /month) ?. Actually I failed in doing so, and i regret now on that 8.5k purchase… :( Or any alternative i can find??
    Thank you

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  5. hello
    i recently swiped ma hdfc credit card for buying laptop of 42,ooo in a 6 months e.m.i option…,
    as mentoined by the merchant the interest rate and processing fee was zero %.
    so now what will be my first month and next emi’s worth…??
    also if i pay all the 6 emi’s on specified time ….do i have to pay more than 42k…if yes then how much….?
    i am 1st time creditcard user
    kindly suggest …
    thanks in advance

    Post a Reply
  6. EMI on credit cards is juts a marketing strategy and sounds nice when they advertise 0% down payment, 0% interest and blah blah blah !!!
    The key message here is your available credit limit is reduced by the total amount of purchase which is completely misguiding and unethical as they make it sound as if you owe only the minimum monthly EMI amount right away when you are signing up for such a scheme. Recently I bought a smartphone for INR 25000 and was about to make the mistake of opting for EMI scheme. Then they told me that my available credit will be reduced by exact the same INR 25000 and have to pay a processing fees of 3.5% to ICICI bank. I have no clue why would someone opt in for such madness. I denied the scheme and paid in full. I am better off paying my credit card dues than this stupid scheme.

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  7. I want to pay my cc bill but the bank is not giving me installment option to pay off the bill.Please suggest Wat can b done. Hdfc is the chor bank I have ever worked wit.

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  8. I want to buy a smartphone that costs 30,000rs . But my HDFC credit card limit is 20,000. And i am getting this by 6 montha EMI, That makes 5,000 per month. Can i buy it through this credit card limited to 20,000rs???

    Post a Reply
    • i think you can, but u ll be charged for going over your credit limit , i think it’s around 3%

      talk to your bank officials about or call the customer care

      Post a Reply
  9. Hi,

    I need a clarity on credit card with emi (non zero interest rate)

    If I purchase a product worth 10000 and go for emi (say 6 months). How much I’ve to pay every month.

    Assuming, 12% for 3 and 6 months
    13% for 9 and 12 months. (interest rate per annum right? )

    Please let me know how to calculate these monthly payments.

    What extra charges will be applicable (like processing fees, service tax)? How to include these while calculating monthly payments?

    Post a Reply
  10. Hallo replay all above questions if ur a don in credit card related issue
    R else have 5 times n sleep well..

    Post a Reply

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