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How does EMI on credit card works?

How does EMI on credit card works?

Last Updated : July 20, 2016, 7:07 a.m.

Are you a shopaholic who can’t resist the temptation to buy the things without having any money to pay for the product and don’t mind to use the EMI on credit card option to pay over a period of time without understanding how does the whole process of credit card EMI work? If yes, then you are badly trapped into the cycle of credit card EMIs.

Payments on credit card can be done in three ways- the most simple and convenient way to make the payments is pay off the entire principal amount before the due day without paying the interest on it. Second way of paying the outstanding amount is pay small amount now and carry the rest of the principal amount in future by paying interest on it.

The third option to make the payment against the amount and converting the entire amount into an equated monthly installment for credit cards-much like you pay each month in a personal loan or home loan. The first and most important thing which you need to understand about this whole process of How credit card EMI works, before committing to such a liability. Let’s first try to understand the impact of converting a payment into such EMI purchase on credit card. If you are in an impression that credit card companies are allowing to pay the amount in small monthly installments without charging anything then you are wrong. You will be shocked to know about the charges you are paying on your monthly EMIs, if you read the terms and conditions of the credit card company or the monthly statement you receive as credit card bill. Here are some important points that you should consider before selecting this option of EMIs.

How Credit Card EMI Works?

Credit card companies earn their profit and make money by earning interest on late payment that generally people make. If you are among those customers who are paying off their credit card bills within the due dates, then essentially you are not into their good books and not the dear customers as you are not giving them opportunity to earn more money on your financial transactions.

To make profit and earn more these credit card companies lure customers by telling them options to repay-in-future or pay-interest option, the EMI on credit card option works great to their benefit. It is beneficial for various buyers as he/she might be having some financial crunch or financial limitations due to that he/she is not able to make the full payment. So, this EMI option gives them a temporary relief and extended credit limit to shop and buy things on credit and pay later.

Two Types of EMI Offered by the Banks

Almost all credit card companies offer two types of EMIs-one is a free zero interest rate EMI and the other is low interest rate EMI. One type is free zero interest rate EMI and the other type is a low interest rate EMI. The late payment interest rates that you would have paid normally in case of non EMI option. This low EMI means that the bank understand your inability to pay the whole amount in one segment, therefore, it allows you to convert into future dated payments with a slight lower interest rate. If the credit card companies do not allow for this, then you might actually default and not even pay the interest part, leave alone the principal amount. So, it is a good option for them as well.

  1. Zero rate EMIs: Zero interest rate EMI is a also a good option to make the payment against your credit card debt. As in this option you don’t have to pay anything extra here and the credit card company does not earn anything out of you. Therefore, it is total win-win situation for you to avail this option and pay in easy monthly installments without paying anything extra.
  2. Low rate interest EMI: The low rate interest EMIs option offer you a lower are of interest in the range between 1.25% to 1.99% per month which is much lower rate of interest charged by the these credit card banks if you default or make late payments. While availing this option you must consider that bank will charge processing fee on converting your outstanding amount into EMIs. Besides, if you want to prepay, then you might end up paying a pre-payment charge as well.
  3. Processing fee: These banks charge processing fee on converting your outstanding into easy EMIs. The processing fee is one time fee charged by these banks against your outstanding. These banks either charge a sum amount or a set percentage of the processing fee on the total amount depending upon the bank’s discretion.
  4. Reduced credit limit: Once you opt for the EMI option, the credit card limit is automatically reduced by the amount of principal outstanding. As you keep paying the EMI, the debt reduces. But, you should always keep this in mind that till you don’t pay all the EMIs you can’t shop or make payments to the upper limit of your credit card. Let’s understand this with an example:

Rajneesh Joshi, holds a credit card with upper limit of Rs. 50,000. He has recently purchased a laptop of Rs. 35,000. Now, he has converted that amount into EMIs and paying the EMIs on monthly basis. So, for the time being he is paying EMIs his upper limit to spend on his card is Rs. 15,000 and it will keep increasing with each EMI and will reach to the upper cap once again after he will pay all the EMIs.

Minimum payment due: This is another important thing that you should consider while converting your dues into EMI. Many banks will ask you to pay this EMI as a minimum payment due each month. So, while the EMI option was meant to put the consumer at ease with small payments over the period of time that payment now has a bloated minimum amount.

Other points to consider: The facility to convert the outstanding amount into EMIs might not be available for all products you buy. It might be that the bank offers this facility for a few merchants or for limited amount or products. So, before making the big purchase, if you are thinking about  converting that amount into the EMI, first try to find out about that facility either the bank is offering or not. Many banks allow a certain amount to qualify for EMI option, amount below than that will not eligible to convert into the EMIs. Moreover, these banks allow you to choose the tenure of EMIs of 3,6,9,12 months.

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