Planning to use the EMI on credit card option? Here’s what you need to know

EMI on credit card is a part of life now. When you make a credit card purchase, you get an email or SMS from your bank asking if you wish to convert that spend to an EMI.

This facility is either offered on some products / credit cards or on a threshold value. Previously this was for amounts exceeding Rs. 5,000, but nowadays, some banks offer to convert even a spend of Rs. 2,000–3,000 to EMI.

Sounds tempting, but should you go for it? Here are some things to consider before doing so:

The Good (relatively speaking)

  • Useful during emergencies when you have to spend a high amount and would prefer not to pay off entire outstanding amount
  • Converting to EMI attracts a lower rate of interest (usually 12–25%) v/s part payment and revolving the balance at a higher rate (35–45%)
  • Merchants sometimes tie up directly with the bank to offer a special interest rate or a lower processing fee during a sale
  • No documentation is needed to convert a spend to EMI, unlike with a personal loan
  • In a worst-case scenario, if you lose your job / source of income, converting spends or outstanding to EMIs as a personal loan can tide you over and prevent a dip in your credit score due to default. This is at the bank’s discretion though

You can also stagger your card dues (if you have more than one card) by opting for a balance transfer, where part of / entire outstanding amount on one card is transferred to the other card (upto a percentage of the second card’s available credit limit). This lowers your overall outflow by letting you make smaller payments on both cards instead of a large payment or higher interest on revolving credit on a higher amount.

What To Watch Out For

  • Credit limit is reduced by the principal outstanding amount, and is restored as you begin making EMI payments, which can hamper your spending capacity or in an emergency
  • One time processing fee on approval is levied, which adds to your cost. It is a percentage of the total amount (can be waived at bank’s discretion)
  • Service Tax is levied on the interest component, the processing fee, and pre-closure charges, if any
  • The EMI is added to your card bill and has to be repaid in full, over and above your current outstanding balance, causing your Minimum Amount Due to increase substantially
  • Cannot be availed on gold and jewellery purchases
  • Pre-payment / pre-closure carries a stiff penalty on the outstanding principal amount (can be waived at bank’s discretion)

When used often or recklessly, the EMI option can dent your finances. Used carefully, it can be quite convenient. Choose wisely!

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Originally published at on July 27, 2016.