Reduce liability through EMIs

Opt for the scheme to pay for big credit card transactions, mostly at zero interest.

When a customer service executive told Shyamala Banerjee about credit card bill payments in equated monthly instalments (EMIs), she rejected the offer outright. She assumed that the bank was asking her to take a loan. A second call a few days later cleared her doubts and she thought it was not a bad idea.

“They said I could pay my credit card bills in instalments over six months and at zero interest,” says the school teacher.

These days, most credit card companies suggest their customers repay for big-ticket transactions (holiday, jewellery or consumer durables) in instalments, mostly at zero interest.

Typically, any transaction of Rs 5,000 and more can be paid through EMIs. Most banks say if a card has a limit of Rs 1 lakh, cardholders can repay transactions up to Rs 75,000 in monthly instalments. The repayment can be done over six, nine, 12 or 24 months.

Shyamal Saxena, head-retail banking, Standard Chartered, says, “Many customers don’t buy their preferred goods if the cost exceeds their budget even marginally. Here, the zero interest EMI scheme helps.”

Banks have a tie-up with merchants (retailers or manufacturers) and they bear the interest on behalf of the customer. In case of a short-duration offer — say a three-month offer — there are no hidden charges. But if you opt for repayment over a long period, you will be charged both processing fee (two-three per cent of the transaction amount) and service tax.

For someone like Banerjee, who had incurred unforseen expenses the last month through her credit card, such a scheme could be helpful. “I suggest she takes up the short-term scheme (three months), but only after she is sure of not paying anything extra,” says a private bank executive.

Needless to say, it should not be a cardholder’s first choice. Credit card bills are high interest loans and should be paid on priority.

Opt for the EMI scheme if you have an urgent big-ticket purchase to make. For instance, Gaurav Gupta used up his entire credit limit to buy consumer durables when he shifted base to Pune from Nagpur. He got the zero-interest offer on his LED television, but not on the refrigerator. “I had to pay one per cent extra (monthly) on my refrigerator. But it will be staggered over six months,” he says.

In this case, once the EMI starts, you can use only the unused credit limit. And, if you miss an instalment, there will be an extra cost of 2-3.5 per cent, say bankers.

KVS Manian, group head-retail liabilities & branch banking, Kotak Mahindra Bank, explains: This arrangement is specially targeted towards ‘revolvers’ in banking parlance. A revolver pays only the minimum amount payable on his/her credit card outstanding on the due date. This increases the person’s liability.

Sneha Jha, a shopaholic, was toying with the idea of taking a personal loan to pay her outstanding credit card bill. But bankers advise against it. The EMI on a card bill works out cheaper than a personal loan, they say.

The annual interest cost on personal loans is 18-30 per cent. But if one is able to strike a good deal, the rates can be cheaper. On the other hand, if you don’t get the zero-interest offer, you are charged a maximum of 20 per cent a year on a credit card EMI. One can even get a lower rate if the relationship with the bank is good.