Deepti Singh, a teacher in her late twenties, loves to shop. And when she goes out of cash, there’s always her credit card. No wonder, at the start of every month, a significant part of her salary is used to pay her credit card bills.
Recently, Singh got a call from her bank informing her about an option to convert the credit card outstanding into equated monthly instalments (EMIs) at zero cost. She jumped at this offer. After having paid an interest of two-three per cent every month for years, this seemed like a great opportunity.
However, when her monthly instalment statement came, the numbers didn’t add up. For an outstanding of Rs 50,000, her EMI worked out to Rs 4,659. The statement showed that subsequent EMIs would fall by Rs 5-10 every month because of monthly reducing balance.
Nonetheless, the total was Rs 54, 282 — Rs 4,282 more than her outstanding of Rs 50,000. A little number crunching by her friend Ramya Menon showed that Singh was paying 1.5 per cent every month. This translated into 18 per cent a year, equivalent to a personal loan.
The processing fee can be charged in three ways. There is a flat fee or one-time fee, one-two per cent of the outstanding. Then, there can be a fee of Rs 30-100 per Rs 1,000. In addition, there is a monthly interest cost of 0.99-2.75 per cent every month. Various service taxes are also charged.
Subrat Pani, business head-cards, Kotak Mahindra Bank, says, “While banks may not allow you to pay the entire outstanding through EMIs, a couple of big-ticket transactions can be converted.”
Typically, any transaction of Rs 5,000 and more can be paid through monthly instalments. Most banks say if a card has a limit of Rs 1 lakh, Rs 75,000 worth of transactions can be paid in EMIs. The number of instalments can be six, nine, 12 and 24.
The zero charges, which the bank executives promise you, are applicable only in certain cases. For instance, if someone wants to convert his purchases into three-month EMIs, some banks may not charge anything. “This could be a short-duration promotional offer where there are no charges at all,” says an Axis Bank spokesperson.
It can also be applicable if you are transacting at a retail outlet that has a tie-up with the bank. There are certain outlets where one can purchase a white good and the entire bill has to be paid by the credit card. Consequently, this amount is converted into EMIs.
There are other complications as well. Often, the customer gets an impression that the amount being repaid is being treated as a separate loan. And once the EMI starts, the entire card limit — Rs 1 lakh in Singh’s case — can be used again. But it is not true. Till the total amount is paid, one can only use the remaining limit.
Then, if you have a surplus and want to repay the entire outstanding at one go, there is a prepayment penalty. Most banks will charge you one-five per cent on the outstanding. Of course, if you forget to pay EMIs, there will be an extra interest cost of 2-3.5 per cent, say bankers. Financial planners are obviously not very keen about such offers. They say it is only meant for people who are in a serious financial crunch and want to bring down their interest cost. Otherwise, it is restrictive in nature.
Ideally, one should not overuse the credit card or leave a large outstanding. “But if it has already happened, it will be better to go for a personal loan and repay the entire amount in one go. Otherwise, whenever there is a windfall, in terms of bonus or arrears, get rid of the outstanding as much as possible,” says a financial planner.