So, finally, you bought yourself that chic smartphone which costs a good Rs 30,000 with one swipe of your credit card. Talk about being able to resist anything but temptation. Now, what would you prefer? Paying the full 30k next month when the credit card bill arrives, or spreading the payment over the next 6 months, settling in easy instalments of Rs 5,000. Prima facie, the latter seems to win hands down, right?

After all, you get the benefit of settling your dues over an extended period, that too at no extra cost. Welcome to the enticing world of credit card equated monthly instalment (EMI). But before you get seduced, take a look at the fine print. Maybe, the deal really is too good to be true.

Genuine zero-interest EMI credit card schemes (the ones without any extra charges attached) may truly be great deals. Such schemes do exist, but by far, these remain rare sightings. If you come across these, it may make sense to avail of the benefit, provided you are disciplined in your monthly payments.

However, a good EMI scheme, by itself, does not translate into a licence for credit card users to speed-drive on splurge-highway. Users would do well to distinguish between needs and wants, and spend within their means. After all, you do need to pay for what you purchase, even under the best EMI scheme.

The fine print

Generally, credit card EMI schemes are available only on purchases exceeding a minimum threshold, say Rs 3,000 or Rs 4,000. And often, the devil is in the detail, as many such schemes have extra costs attached. The most obvious among these is interest. For instance, if in the example above, the EMI was Rs 5,500 (instead of Rs 5,000), you would end up paying a total of Rs 33,000 by the end of the 6th month – 10 per cent more than what you would have paid upfront.

This translates into 20 per cent on an annualised basis. So, before you go in for the EMI scheme, check if the total of the EMIs exceeds the original cost of your purchase. If yes, there is an interest cost attached. Check whether the cost is reasonable before you sign in. Generally, interest charged on credit card EMI schemes is lower than the regular rates (between 30-36 per cent) charged on the outstanding balance on such cards.

Yet, that does not mean that EMI schemes should be a natural choice for credit card users, especially if they can afford to settle dues within the normal credit period available. A rupee saved is a rupee earned, and the same applies to interest cost, no matter if it comes a tad cheap.

Also, look out for processing charges. Many credit card EMI schemes, even if they carry zero-interest, charge one-time processing fees. This could translate into a tidy sum, when annualised. Say, in the example above, processing fee of Rs 2,400 is levied on the 6-month EMI. While the charge works out to 8 per cent (2,400/30,000), you actually pay 16 per cent on annualised basis (2,400/30,000*12/6). Now, is this really a dream offer?

Users should also take note of pre-closure charges on EMI schemes. Such charges add to cost and reduce flexibility of users in closing the loan. These charges could range between 2-5 per cent of the outstanding principal amount.

Also check whether you are losing out on any discount offers by going in for the EMI scheme. Such cannot-be-clubbed-with-other-offers EMI schemes may not really be beneficial to credit card users.

The discount lost on the purchase is effectively a cost.

In addition, the balance EMI amount is reduced from the overall credit card limit of the user, and only released as and when the EMI gets paid each month.

Also, if there is a default on the EMI, penalty charges may be levied and the outstanding amount may be converted into normal credit card dues, which are subject to very high interest rates.

In a nutshell, do take a closer look at what's on offer before saying yes to the sweet voice on the other end of the phone, or signing on the dotted line at the store.

Related Topics
comment COMMENT NOW