This article is authored by Rajiv Raj, Director & Co-Founder of CreditVidya.
In today’s times, if not used judiciously, a product that comes with perks also has certain disadvantages that can be very expensive. Take for instance, credit cards. While the use of credit cards as a mode of payment has caught on well, most people don’t realise the other side of using a credit card if one does not follow financial discipline.
If you spend beyond your repaying capacity, you can roll over the debt and pay a minimum amount every month. However, it does not come free. Credit cards charge prohibitively high interest rates in the range of 36% to 45% per annum if the outstanding credit card bill is not paid. To deal with this, one may opt for the Equated Monthly Installment, or EMI, route that comes at a lower rate of interest. Banks permit an outstanding of up to Rs 5 lakh for the EMI facility and the rate of interest charged stands in the range of 16% to 22% per annum. Interestingly, one question, I am frequently asked is: how hassle-free and attractive the EMI option of a credit card is.
Let us find out for ourselves.
- The moment you opt for an EMI repayment arrangement, the credit limit stands reduced to the extent of the principal outstanding. As you keep repaying through EMI, the credit limit is freed. To put it simply, opting for EMI can block your spending capacity in the subsequent months. This can be a big factor if you are dependent on your credit card, either to fund your future expense or as a payment mechanism.
- Another factor is the one-time processing fee that banks charge to initiate the EMI option. This fee is charged upfront and adds to the costs to be paid by the cardholder. The fee is generally expressed as a percentage of the loan availed on the EMI option, and generally capped at a fixed sum of, say, Rs 5,000. You can negotiate this amount, and if you are a loyal customer of the bank for a long term, banks may choose to waive it.
- Some banks also offer the insurance option to the cardholder. For an extra charge towards premium, insurance companies offer to pay the outstanding principal in case of an eventuality. This ensures payment of outstanding to the bank and a win-win situation for all three – the cardholder, the bank and the insurance company.
- Besides, opting for an EMI option can help an individual save his/her credit score from falling. To read more about credit scores, click here.
Having stated all of the above, I would like to answer one query: Is this the right and profitable way to repay your credit card bill? The plain answer is NO.
Think of the EMI if and only if you are on the verge of defaulting a payment. It will save your CIBIL score from going down. One should use EMI repayments options sparingly as it can be a burden on one’s finances for a prolonged period of time. Too many EMI arrangements also impact the credit score adversely and one would be better off using credit cards when the need is essential and purpose is immediate.
What if your bank does not offer this facility? ICICI Bank, Standard Chartered Bank and HDFC Bank all offer EMI cards. If your credit card does not offer an EMI repayment option, you should check with the card-issuing bank. In such a situation, the customer has to either go for a personal loan or transfer the balance to some other credit card to ensure timely repayment of outstanding, failing which he has to bear the huge burden of high interest rate applicable on the credit card.
