Credit cards are the best way to manage your finances during a cash crunch. You can use your credit card to purchase goods and services without worrying about not having cash. However, the problem arises when you default on your repayments. Missing one or two payments may not be a big deal, as you can incur interest charges.
But what if you have a huge outstanding due and you cannot repay your credit card bills on time? In such a case, converting your entire credit card bill or part of it into equated monthly installments (EMIs) at an affordable interest rate may be the best option. EMIs on credit cards suit borrowers who are unable to repayments for big-ticket purchases.
Although converting your bills into affordable EMIs may sound like a great option to reduce credit card interest, here are the top factors you must be mindful of:
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Reduction in credit limit due to EMI purchase
When you convert a big purchase into EMIs, it negatively affects your credit limit. For instance, you purchased a product for Rs. 100,000/- using the EMI facility. It is a common misconception that since you have opted for a 6 or 12-month EMI term, your credit limit remains unaffected. However, once you choose the EMI option, your credit limit reduces to the extent of the total outstanding amount due. So, if you have a credit limit of Rs. 100,000/-, a purchase of Rs. 100,000, your current credit limit remains nil. It will start rising as and when you repay the total amount due.
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Processing fees
When you opt for an EMI option, your issuing bank charges a one-time processing fee. The processing fee usually ranges between 1% to 3% of the total loan amount. Some banks can charge a fixed sum depending on the type of credit card and the purchase amount. However, what most applicants do not realize is that you can negotiate the EMI processing fees. You can leverage your repayment history to significantly reduce the processing fees. You can discuss this with your issuer and avail of a waiver for reducing overall purchase charges.
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Online purchase
You may have realized while making purchases online that most retailers offer EMI options to buy their products. Almost all of them have tie-ups with the banks to promote online sales. So, if you are looking to purchase through your credit card EMI, you can look for this option at websites such as Amazon, Flipkart, Myntra, etc.
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Prepayment penalty waiver
It is worth noting that when you choose to prepay your loan amount, you will have to incur a prepayment penalty. You will find this clause in your credit card terms and conditions agreement. The good news is that you can get a prepayment penalty waiver. Most banks offer a prepayment penalty waiver to loyal customers and long-time credit cardholders. So, if you want to prepay your outstanding due and have a good record with the bank, you can negotiate for a waiver.
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Due settlement
When you make purchases with your credit cards, it means that you have debts that need to be repaid before it becomes a burden. As a responsible borrower, you will need to pay your outstanding balance in full and within the due date to avoid interest charges and penalties. The credit card interest rates can range between 25% to 40%, which can prove to be more expensive than other loans.
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Availability of EMI facility
Let us make it clear that not all credit cards come with an EMI facility. Before opting for an EMI option, make sure to check whether or not your credit card has that facility. Mostly, you end up applying for an EMI option only to realize that you are not eligible. So, it is imperative to check and ensure that your credit card has such an option before submitting your application. Also, carefully read the terms and conditions of the EMI payments before making a decision.
In short
The benefit of converting your credit card bills into affordable equated monthly installments (EMIs) is that you can clear your debts without putting any burden on your pocket. It enables you to clear your outstanding dues with minimal financial impact. However, One should not make a habit of EMI conversions as it can affect your savings in the long run.
Before using your credit card to make a big purchase, you must assess your finances and determine whether or not you can afford to repay your bills in full by the due date.
