Planning to pay your credit card bill via EMI? Do the math carefully

Carefully calculate all the charges and interest that are going to be levied once the credit card outstanding bill is converted into an EMI.

Although avoiding credit card usage is key to financial well being, however, even if you use credit cards for monthly spending, all efforts should be made to pay off all outstanding dues on or before the payment due date. Generally buying through plastic money tempts people to spend more as it doesn’t impact the immediate cash flow; but more often than not, people find themselves stuck in a debt trap which is very hard to get out of.

The most common option for people who find it difficult to pay their entire credit card bill on time is to convert their credit card payments into Equated Monthly Instalments (EMI). If you have a hefty card outstanding and are unable to clear it in one go, than converting it into EMIs is very easy. You can do it online through Net banking by availing the EMI option(s) or you can call the customer care or visit the branch of the credit card issuer.

There is also an option available in almost every card to either convert the entire billing amount into EMIs or to select specific card transactions crossing a threshold amount for which you want to pay via EMIs. Opting for EMIs as a substitute for outstanding dues on credit card payment is an option that individuals can avail, but there are several factors that need to be considered before making this choice.

A) Your credit limit on the card will be temporarily blocked/reduced by an amount equal to the bill amount converted into EMIs. When you start paying your EMIs, the bank gradually increases the credit card limit by an amount equal to the EMI paid. Therefore, make sure you have sufficient spending limit left on the credit card to be able to avail/convert the desired bill amount on EMIs and also for any future emergency use.

B) Carefully calculate all the charges and interest that are going to be levied once the credit card outstanding bill is converted into an EMI.

Following are the common charges you have to bear for paying credit card bill via EMIs-

Interest on the Bill – This rate of interest varies from one card provider to another and linked to the tenure of your loan: the longer the tenure, the higher the interest. Interest rate also depends on the risk assessment of the credit card holders. Generally the rate of interest varies from 13 per cent to 26 per cent per annum, depending upon the card provider, tenure and risk profile of the borrower.

Processing fee – It depends upon your card issuer and as few issuers don’t charge any processing fees while some may levy an upfront loan processing usually up to 3 per cent of the amount of your bill (converted into EMIs) or a fixed sum.

Examples of Charges by Credit Card Issuers for EMI conversion:

GST – 18 per cent GST is applicable on all interest rate charges and processing fees

Prepayment/Pre-closure charges – Card issuers may charge you a pre-payment fee if you wish to clear your dues before the end of the loan EMI tenure. For example, Standard Chartered Bank charges a fee of 3 per cent plus taxes on pre-closure of your card EMIs.

It is, therefore, advisable that before opting for an EMI option for your card bill, do the math properly to make yourself aware of the total additional charges you are going to pay. Also, for some cards, when you opt for a longer-term EMI, the card issuer offers a lower interest rate, but that does not necessarily mean that you will end up saving money due to lower interest rates.

The following example shows that a lower interest rate but higher tenure ends up being more expensive than a higher interest rate lower tenure EMI option. An individual has to shell out Rs 4423 extra on a higher duration lower interest rate EMI in comparison to a higher interest rate lower-duration EMI.

To summarize, although paying off credit card bills through an EMI plan is an option for individuals who do not have enough means to pay off their entire outstanding bill, however there are several factors that have to be considered before opting for an EMI option. The financial implications of all factors should be weighed in before making such a choice. It should also be remembered that the EMI plan should only be used as a last resort and only in financial emergencies.

(By Rahul Agarwal, Director, Wealth Discovery/EZ Wealth)