What is EMI option on credit cards?
EMI or equated monthly instalment is the amount the borrower needs to pay every month to the lender of the loan. In most cases, an EMI would be the sum of principal amount and the interest divided by the tenure of the loan. However, the interest calculation varies from case to case.
EMI on credit card purchases is almost a similar concept. It is the third repayment option introduced by the credit card companies to make debt clearing even easier for the credit card users.
Two existing credit card bill payment methods
Typically, credit card users are supposed to clear their credit card bill in two ways :
While the first repayment method attracts no interest, except for providing the users a larger repayment window, the second comes with its strings.
Once you have paid the minimum due, the bank starts charging interest on the remaining amount on a daily basis.
The recent addition to the credit card repayment options is the EMI conversion option. Availability of the option is, however, subjective to the bank and the customer. Not all the banks provide the option, nor all the credit card users can avail it. You need to check with your bank for the availability of EMI conversion option on your credit card.
‘Convert your credit card bill into easy monthly instalments’, ‘shop in full, pay in parts’ are the popular catchwords being used by credit card providers to encourage customers to opt for EMI conversion option on their credit card outstanding bills.
While some call EMI conversion on credit cards a trick to lure customers, others find it useful especially when making big ticket purchases using credit cards.
Though the concept is simple, many of us are confused whether or not to opt for the option.
Well, we may not tell you whether you need to go for it or not, rather we try to educate you with all the required information about the EMI conversion option, which could help you take a decision based on your own financial situation.
Converting credit card payment into EMIs is almost similar to availing a loan and repaying it over a specific period. Your total credit card bill or a credit card purchase related to one particular item will be converted into a loan allowing you to repay your debt in small instalments each month.
Just like how a typical loan attracts interest on principal, a certain amount of interest will be added to the actual credit card bill while converting it into a loan. The interest will be added to your total bill and the sum will be divided equally over the chosen tenure.
The tenure offered on EMI conversion is typically between 3-24 months. The longer the tenure, the higher will be the interest rate. A 24-month tenure loan will attract more rate of interest than a 3-month loan. However, the interest charged on credit card EMIs is relatively lesser than revolving interest rate charged on credit cards and any late payments.
Thus, the EMI conversion option provides a temporary relief allowing you to pay both principal and interest every month till the debt is cleared.
Many banks follow monthly reducing balance method to calculate EMIs for credit card payments. Unlike flat interest rate and revolving interest rate, the reducing interest rate benefits the user as the interest keeps reducing as the tenure goes by.
In the monthly reducing balance method, the interest will be applied to the principal, which reduces each time you pay an EMI. That means the interest will be charged only on the remaining loan balance, which is the difference between your actual loan amount and the total amount of EMIs you have paid till then.
Though the EMI amount remains the same over the tenure, the payment made towards principal and interest keeps changing every month. That means you will be paying less interest as your loan keeps reducing over the period.
While converting your credit card bills into EMIs, banks typically charge an interest of 1.2% to 1.8% per month. The interest, as mentioned earlier, will be charged on the outstanding loan amount every month.
Interest Rate Charged by Popular Banks is listed Below:
|Bank||Type of Interest Calculation||Interest Rate||Available Tenure (months)|
|HDFC Bank||Reducing interest rate||1.5% per month||9-36|
|ICICI Bank||Reducing interest rate||13% per annum||3, 6, 9 and 12|
|15% per annum||18 and 24|
|SBI||Flat rate||14.5% per annum||6, 9, 12 and 24|
|Axis Bank||Reducing interest rate||1.5% per month||6, 9, 12, 18 and 24|
Note: Rates mentioned in the table are as on 6 Nov’17
Besides interest rate, banks will also charge a onetime processing fee which typically varies from bank to bank. Other charges include goods and services tax (GST), which will be levied on interest amount of EMI and processing fee on a monthly basis. Effective from 1 July 2017, the GST on credit card payments in 18%.
If you opt for cancellation or foreclosure of EMI facility, you will charged a pre-payment fee on the outstanding principal loan amount. The foreclosure fee will also attract GST.
|Bank||Processing fee||Pre-closure charges|
|HDFC Bank||1% of loan amount||3% on the outstanding principal|
|ICICI Bank||No fee||Not available|
|SBI||2% of loan amount (min. Rs.199 and max. Rs.1,000)||3%|
|Axis Bank||1.5% or Rs.150, whichever is higher||3%|
Note: Rates mentioned in the table are as on 6 Nov’17
There are two ways in which banks will offer conversion of credit card payments into EMIs.
The first option enables you to convert your entire credit card outstanding bill into equated monthly instalments. However, not every bank will offer this nor every cardholder can avail it. You need to call your respective credit card provider to check your card’s eligibility. You can also check your internet banking account to know the same.
Once you confirm the availability of EMI conversion option, you should follow a bank specific method to avail the option. Different banks offer different ways to convert your credit card bill into EMI. A few of them include using phone banking, internet banking or by sending an SMS.
In the second option, users have to make retail purchases, either online or offline, eligible for EMI conversion, using their credit cards. Many banks have partnered with leading brands across industries to provide best EMI deals for their customers.
Once they made the purchase, their credit limit will be debited with the total purchase amount, while the EMI amount will be billed every month. The EMI will be included in the minimum amount due payable by the customer.