Credit Card EMIs Bring Convenience At A High Cost
Credit card EMI looks like a great facility but it should not be the first choice as it will lead to a higher interest outgo.
Make a large expense using a credit card, and it starts a process of sending messages and calls asking the user to convert the expense into an equated monthly instalment, or EMI, payment.
This appears to be a great facility because it takes away the pressure of paying the entire amount all at once. In addition, it can also prevent a default if the amount cannot be paid, but this comes at a high cost.
The manner in which the EMI facility is used is also vital to ensure that some amount of discipline is followed.
There is a large choice when it comes to the question of an EMI facility on a credit card. This entails dividing the total value of a large transaction into smaller pieces and paying them off over time. This is why the entire process is referred to as EMI, because the payment is equal throughout the time period chosen.
The banks have made it very easy to convert a transaction into an EMI, and there is a choice offered in terms of three months, six months, 12 months, 24 months, and so on. This choice is very wide, and hence it gives the idea of a period that the individual can select that meets their requirements. Individual cardholders will receive phone calls from the bank regarding the conversion, as well as SMS instructions.
All this makes it very easy to complete this procedure.
The starting point of the entire EMI process is that not every transaction can be converted into an EMI.
There is usually a minimum amount of spending that has to be made to be able to convert this into a multiple-instalment one. This limit is set by each bank for their different customers. For example, some banks can have a transaction limit as low as Rs 2,500 for it to be eligible, while others might offer this to a few customers whose minimum transaction amount is Rs 10,000 and above.
So, the first thing to know is whether one qualifies for this particular facility. However, if the amount is large, the bank is also likely to make multiple offers to get it converted into an EMI.
All this is not free of cost for the card user.
There is a cost attached to the process in the form of an interest charge on the total amount. The interest rate that will be charged on different periods of the repayment can also vary. This becomes the additional amount to be paid, and the larger the expense involved and the longer the time period for the EMI, the higher will be the total amount of interest paid.
This is one thing that has to be known right at the start of the process because the individual should not be under the impression that the bank is doing this for free. There is a cost attached to the facility. The interest rate will be less than what the bank is charging for the revolving credit facility, so it looks better in that sense, but that is just relative.
When Should You Use This?
Cardholders should use this facility only when they have no other option left.
This should not be the first choice for the customer because it will lead to a higher interest outgo. The process is so easy that falling into the trap of making such a choice is simple, but the load that this puts on the overall finances is high. The first step to be taken is to put expenses on a card only when you can afford to pay them off. But assuming that there is no other option left and you have gone with the EMI option, be sure to ensure that the repayment period is not very long so that the impact is minimised.
Arnav Pandya is Founder Moneyeduschool