Imagine this: This Diwali, you bought a 42-inch high-definition LED television and a new sofa set. You ended up spending more than your budget. Now, you have run up a huge credit card bill and cannot afford to make the full payment on the due date.
You can make a part payment. But you will be charged interest on the remaining amount till it is cleared. This is very expensive as banks charge interest rates of 36 per cent or upwards on unpaid credit card dues.
You can also either take a personal loan or a secured loan, such as a loan against a fixed deposit, to repay the credit card outstanding. In this case, the rates are lower than on credit card loans. Banks charge anywhere between 13-22 per cent on a personal loan and between 10.5-12.5 per cent on a loan against a fixed deposit. But you have to go through the process of applying for the loan, waiting for it to be approved and the money to be disbursed.
This may take up to a week. Also, remember that every time you apply for new credit, your credit profile will be checked and any additional loan could impact your credit score, said Jairam Sridharan, head of consumer lending and payments at Axis Bank.
Another easier and more convenient option is to convert the credit card outstanding into equated monthly instalments (EMIs) and pay it off over a period of three to 12 months. In this case, the rates are typically half of the interest on unpaid credit card dues. So, against 36 per cent, you have to pay only 18 per cent.
“There is no need for new documentation or application. All you have to do is to call your bank or card issuing company and ask for the option to convert the credit card outstanding to EMI,” Sridharan says.
Today, most banks or card issuing companies offer this option. In fact, if your bank has a tie-up with the store, you can opt for the EMI while making the purchase itself, says Nithish Asthana, general manager, First Data - ICICI Merchant Services, a company that tracks electronic commerce and payment services.
According to a survey done by First Data - ICICI Merchant Services, the spends on credit cards through EMI have increased by 10 times during Diwali this year as compared to last year. This was based on data on credit card spends between October 3 and 23 this year and between October 14 and November 3 last year. The EMI option is available even for online payments today.
“The Reserve Bank of India strengthened the disclosure norms around EMI payments last year. So, now stores and banks have to disclose the actual interest rates to customers who opt for the EMI option,” Asthana points out.
One thing to keep in mind is that the credit limit on your card will come down to the extent of the EMI and you can utilise only the remaining limit. Also remember that if you don't pay the EMI, it will attract interest at regular credit card rates, which is very high. That is why the EMI option is advisable only for big ticket purchases such as consumer durables, furniture, mobile phones, holiday packages and so on.
Another drawback is that if you are buying on EMI, you may not get the discount that is offered to those making the full payment. So, check this with the store before converting the payment into EMI.