Is EMI on credit card helpful?

While this might reduce your spending capacity for some time, it could prevent your credit score from falling

Every time you swipe your credit card for a big amount, you get a message from your bank asking if you want to pay through Equated Monthly Instalment (EMI). But how hassle-free and attractive is this option?

While the use of credit cards as a mode of payments has caught on well, most people don't realise the perils of reckless use of credit cards. If you spend beyond your repaying capacity and do not pay your bill on time, most credit cards charge prohibitively high interest rates in the range of 36 per cent and 45 per cent.

So, how does one deal with this? One way is to opt for the EMI route that comes at lower rate of interest. Let us find out how to go about it.

It is important to know whether your card has an EMI facility. Most of the large banks that are active in the credit card segment offer this facility. Banks permit an outstanding of up to Rs 5 lakh for EMI facility and the rate of interest charged is in the range of 16 to 22 per cent.

TO OPT FOR EMI OR NOT

• Credit limit is reduced to the extent of the principal outstanding and is freed as you keep repaying
• Keep an eye on credit limit during the entire EMI period, which could extend up to two years
• The one-time processing fee will add to your cost
• Do not use EMI facility as a source of leverage
• Use it only if you are on the verge of defaulting on a payment

So, check with your card-issuing bank whether it offers the facility or not.

If your credit card does not offer the option to repay through EMI, then you can either opt for a personal loan or transfer your balance to some other credit card to ensure timely repayment of the outstanding amount, failing which you have to bear high interest rate on the credit card. This may pull down your credit score if you fail to repay time.

On the other hand, if your bank does offer the facility to repay your through EMI, there are some factors you need to be aware of.

Credit limit is reduced

The moment you opt for an EMI repayment arrangement, the credit limit is 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 issue if you are dependent on your credit card either to fund your future expense or for some routine payments.

A bank may offer EMI facility for as up to two years. This means for two years the credit card holder has to bear with lowered credit limit. Banks do not increase credit limit of a credit card when outstanding amount on that card is being paid through EMI. You have to be careful that you don't exceed the credit limit while using your card throughout the tenure of the EMI facility.

Processing fee

Another factor you need to bear in mind is the one-time processing fee that banks charge to initiate EMI option. This fee is charged upfront and adds to the costs to be paid by you. The fee is generally expressed as a percentage of the loan availed on EMI option. Usually, it does not exceed Rs 5,000. You can negotiate this amount, and if you are a loyal customer of the bank for a long time, the bank may even choose to waive it. In some cases, the bank may partly waive the processing fee and ask the credit card holder to pay the remaining up-front.

Insurance option

Some banks also offer insurance option to a cardholder. For an extra charge towards premium, insurance companies offer to pay the outstanding principal in case of an eventuality. The premium is added to the outstanding amount and the credit card holder is intimated accordingly. The EMI amount takes care of both - the outstanding to be paid and the premium to insure the person. This insurance arrangement helps in payment of outstanding to the bank. It is a win-win situation for all three parties involved- the cardholder, the bank and the insurance company. Besides this, opting for an EMI option can help an individual save his/her credit score from falling.

Given these advantages of paying a credit card bill through an EMI option, a question that merits attention is: Is this the right and profitable way of repaying your credit card bill? The answer is no. You should spend when needed. You must remain within the limits defined by your monthly income.

Typically, it is seen that impulse purchases, during festive season or sales, lead to increase in use of EMI facility by credit card users. Avoid such situations by preparing a list of items to be bought,with the price limits.

EMI facility is not to be seen as an enabler and a source of leverage when one is on the shopping spree.

You must think of EMI option if and only if you are on the verge of defaulting a payment. While it is useful to tide over a temporary cash crunch and can save your credit score from going down, it can be a burden on your finances for a prolonged period of time. Also, too many EMI arrangements also impact credit score adversely.

The author is, Director and Co-Founder, www.creditvidya.com