When it’s festival time, consumers want to splurge — however, their limited budgets may come in the way. This is where credit card equated monthly instalments (EMIs) option comes in — enabling customers to break big purchases into smaller bills. One can repay the money in multiple instalments as per the repayment capacity.
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How it works?
While making a purchase, users can convert their credit card spend into EMIs in two ways — either on the e-commerce portal itself through instant EMI conversion, or by converting the transaction amount into an EMI after the transaction.
In the case of direct EMI conversion, the merchant converts the price of the product into EMIs based on the choice of tenor at the time of the purchase.
In the latter case, users are required to reach out to the card issuer with a request to convert the outstanding balance into EMIs. The interest rates are determined by the card issuer based on the credit history and the credit limit is reduced by an amount equal to the full transaction amount converted into EMIs.
Both processes include the interest rate, processing fee, foreclosure charges and late payment fee. Nevertheless, in the case of merchant EMI offers, most of these rates get adjusted against the discount.
The EMI interest rates offered on e-commerce websites are usually slightly lower or almost similar to the interest rates offered on EMI conversion post-transaction.
Benefits of credit card EMI option
According to Mayank Markanday, Head of Credit Card Business, AU Small Finance Bank, this option lessens the burden of paying the full amount on the payment due date as customers can repay the money in multiple instalments as per their repayment capacity.
“This simply means that upfront financial strain is low,” Markanday told CNBC-TV18.com.
For making payments, users get a flexible tenor of 3-36 months. Also, it can save customers from the high interest rates. Several lenders also offer the option of no-cost EMI, he added.
No-cost EMI is an offer by which users can pay their EMI provider only the product price, equally divided over their repayment timeline. For example, if someone buys a Rs 36,000 item at a six-month tenor, they can pay the EMI provider Rs 6,000 every month for six months, amounting to a total of Rs 36,000.
Things to keep in mind
Markanday asked users to choose a right tenor and pay the full outstanding amount (including the EMIs) by the due date. Missed payments will attract late fees and finance charges.
It’s vital to note here that with the EMI option, the purchase amount is blocked against the credit limit. So, the available credit limit is lowered till the user pays off the EMIs. The credit limit increases after every payment and is equivalent to the amount paid.
Additionally, customers should be aware that this may reduce their credit score.
“This happens because the credit utilisation ratio (CUR) jumps up when some of the credit limit gets blocked,” Paisabazaar said.
CUR is the ratio of purchases made against the credit limit of the card. CUR above 30 percent is not considered to be good and might result in a drop in credit score.
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