Does it make sense to convert your credit card dues into EMIs?
The EMI option is available either during the purchase or at a later date.
If you recently made a big ticket purchase through your credit card, chances are you must have received an SMS or e-mail from the credit card issuer encouraging you to convert your outstanding dues into EMIs. Now, this seems like a viable option at first glance, especially if you find yourself in a situation when you cannot afford to pay-off the entire amount in one go. However, there are no free lunches in the world and converting your credit card dues into EMI is no exception. It is important for you to be aware of what credit card EMI option entails before you opt for it.
How does EMI on credit card work
Credit cards EMIs are quite similar to other loan EMIs. You pay a portion of the principal loan amount along with interest each month and thus, clear off your dues over a period of time.
The EMI option is available either during the purchase or at a later date when the amount is overdue. Often the card issuer would themselves extend this option to you through e-mails or SMS when your transaction breaches a certain amount. In addition to this, lenders often tie up with stores or manufacturers for EMIs on certain or all products. In such cases, you can opt for the EMI option while making the transaction. Banks offer Credit card EMI option to consumers depending on your card and credit behavior.
Things to consider before converting your dues to EMIs
Interest rate: Credit card issuers charge an interest rate on conversion of credit card dues to EMI. This can range anywhere between 12–20% per annum. However, the interest rate on EMIs can be significantly lower than the rate charged on late payment of credit card dues, which can go up to as high as 45% p.a.
Processing fee and service tax: Conversion of credit card dues to EMIs may attract processing fee and service tax on the interest amount of EMI. For example, HDFC Bank charges 1% of the loan amount as the processing fee of the conversion while Axis Bank charges 1.5% or Rs 150, whichever is higher, for the same. However, some banks (such as ICICI Bank’s Instant EMI category) does not charge processing fee for conversion of credit card dues to EMIs.
Reduced credit limit: Unlike the usual repayment of credit card dues, converting your credit dues into EMIs will block the outstanding amount against the credit limit on your card for comparatively longer tenure (depending on tenure of your debt i.e.). For example, assume that your credit limit is Rs 50,000 and you have converted a purchase of Rs 16,000 into 9 EMIs of Rs 2,000 each. In this case, your credit limit will come down to Rs 34,000 before the payment of your first EMI, which will progressively increase by Rs 2,000 each month with the payment of each EMI.
Prepayment charges: Banks penalize foreclosure of outstanding loan by charging a certain percentage on the outstanding amount. For example, both Axis Bank and HDFC Bank levy a prepayment penalty of 3% on the outstanding principal amount of the loan. HDFC Bank also requires you to pay off the pro-rata interest applicable and the outstanding balance on the card for prepaying the outstanding loan.
Absence of discounts: Availing a product through credit card EMI option may mean foregoing the discounts that are usually offered on cash transactions. This will act as another additional cost of availing credit card EMIs.
Converting credit card dues into EMIs can be a costly affair, given that it increases the overall cost of goods. Try to pay the outstanding dues in one go if you can afford to do so. If you cannot - as in case of big ticket purchase, breaking the outstanding amount into affordable EMIs can be a convenient way for repaying the bills. However, make sure to go through all the associated charges, such as interest rate, processing fee and prepayment charges. Also ensure the timely payment of EMIs to avoid late payment fee and further interest charges.
by Naveen Kukreja – CEO& Co-founder, Paisabazaar.com