Due Diligence. All you need to know about credit card EMI

Are you planning to use the credit card EMI option to purchase big-ticket items this festival season?

Here, we lay down some points that you need to know before availing yourself of the equated monthly instalment option on your credit card.

Note the rate

Pay attention to the interest rate you are charged.

Different interest rates are applicable to different tenure options that span three to 24 months.

Generally, credit card companies charge interest at the rate of 12-15 per cent per annum.

It’s a good idea to compare the interest rates on credit card EMIs with the rates charged on consumer durable loans offered by various banks and financial institutions.

Also, check if any processing fees are applicable.

Make an informed choice taking into account total effective cost.

Sometimes, banks offer no-cost EMI on certain products, which means you need to pay just the price of the product or the service with zero interest component in your instalments.

It’s another thing that no-cost EMI could be a marketing hook.

That’s because, often, the discount you would have been eligible for — had upfront payment been made on the purchase — will not be allowed in case of credit card EMI payment option.

The discount foregone may nullify the interest benefit.

No ‘MAD’ option

Buying with a credit card using an EMI option is different from making a purchase using a credit card and then opting to pay the minimum amount due on the bill.

In the latter, credit card companies allow you to defer your liability by paying only a portion of your monthly outstanding due — this is called minimum amount due (MAD), which is 5-10 per cent of the total outstanding due.

Despite the higher interest charges in this option, paying MAD provides a breather at times of cash crunch and helps in avoiding the late fee and penalty that is usually charged on non-payment of dues within the cut-off date.

However, the MAD option is not applicable to the EMI charge on your credit card dues.

Say, the due on your credit card for September is ₹30,000, including EMI charge of ₹20,000.

In this case, the MAD would be ₹20,500 (EMI of ₹20,000 plus 5 per cent MAD on the balance ₹10,000).

If the credit card dues do not include EMI charges, the MAD would be ₹1,500 (₹30,000 x 5 per cent MAD).

Pay by due date

If you miss the deadline to pay credit card dues that include EMI charges, you will be heading for trouble.

In addition to the late fee charges, interest at exorbitant rates of up to 40-50 per cent per annum will be charged on the total due amount.

Worse, the interest charge wouldn’t be from the due date of the credit card payment but from the date of each transaction; this could jack up the interest charges significantly.

Simply put, if there is a default of an EMI payment, one would lose the interest grace period of 15-45 days that credit companies offer customers.

For example, say, on October 20, 2020, the EMI is charged to your credit card, which is due for payment on November 10.

If you miss the deadline and make the payment on November 15, you are not only charged the late fee amount but also interest charges from the date of transaction, that is October 20, till the date of payment.

In this case, you would lose the interest grace period of 21 days — October 20 to November 10 — offered by the credit card company.

Limit blocked

When you opt for credit card EMI, the amount equal to the outstanding EMI amount will be blocked in your credit card limit and only the balance can be utilised for your future credit card usage.

Prepay with fee

If you want to prepay the EMI amount before the due date, you will be levied foreclosure charges. For example, ICICI Bank charges a foreclosure fee of 3 per cent.

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