How Credit Card EMI Works?

27 MAY, 2022

Credit card EMIs are the way to pay dues over a period of time. People who cannot resist the urge to shop or are buying big value items could consider this option as a potential ‘loan’. This feature of the credit card benefits those who do not have immediate funds or even enough money to pay the entire amount when the bill is generated. However, you must understand how the credit card EMI procedure works to prevent falling into a debt trap. Since you will be charged a processing fee and an interest rate, you ought to calculate your monthly outflow. It is possible to do so by using a credit card EMI calculator is important before the charge is credited.  

Credit card payment options 

There are multiple ways in which one can pay their credit card bills. 

The first and most financially wise option is to pay the entire billed amount before the due date. This is convenient and straightforward; you pay what you see and there is no interest on it. 

Another way to clear off the outstanding amount is by paying the minimum amount due or any amount over that. The balance of the principal amount gets carried forwarded to the subsequent billing cycles and one keeps paying interest on it, till it is settled.

The last alternative is to convert the complete amount into an EMI or equated monthly installments. This credit card feature is similar to any loan that you would take otherwise – a personal or home loan. You are charged a rate of interest a processing fee and you pay the larger amount over a tenor decided by you. The tenure could be three, six, nine, or twelve months.

This conversion does not happen free of charge which is when a credit card EMI calculator comes into play. Being clear about the terms and conditions and the amount of the monthly installments is very important. 

How does Credit Card EMI work?

A credit card benefits its users in more ways than one but also has its downsides. One can become complacent and spend more than what was budgeted for. If you spend more than you can pay off and are unable to clear your dues, you start accruing interest and spiral down into a debt pool.

EMI option gives some respite from the accruing interest and piled up dues and prevents your financial situation from disrupting. 

Understanding the Credit card EMI landscape 

Each credit card has conversion options as well as varying interest rates and charges. Getting clarity about which one you are opting for would help you make wiser financial decisions. The common types of EMIs are the zero interest rate EMIs and the other option is a low-interest EMI. 

The type of EMI gives away its nature but to explain, the former comes at a 0% interest rate and is also called No-cost EMI. The latter is at a rate lower than what gets charged to pending balances that go beyond the due date. 

1. No-cost EMIs: This is a zero-interest rate EMI which is the best option to pay your credit card bill. Some credit cards may charge a processing fee, which is a small amount. It allows the EMI option to become like an interest-free loan. A brilliant choice for those opting for EMI. 

2. Low-cost EMIs: These are reduced or low rate interest rate EMIs options where the rate of interest charged varies from 1.25% to 1.99% per month. This amount is significantly lower than the interest rate charged by credit card companies for late payments or defaulters. In addition to the interest being charged, a processing fee is also charged. 

Apart from the interest being charged when you opt for a credit card EMI conversion, there are a few other costs associated as well. 

Processing fee: Credit card companies levy a processing fee to convert the outstanding amount into easy EMIs. The handling fee is a one-time charge and is a very nominal sum. This could be a flat amount or a percentage of the total amount depending on the bank you are dealing with. 

Reduction in credit limit: The credit limit of your card is reduced by the total principal amount. As and when you pay the EMI, that amount gets freed up from the blocked credit limit. Till you do not clear all the EMIs, you cannot utilize your entire credit limit.

E.g. Assume your credit card limit is Rs. 1,50,000. You now purchase a phone for Rs. 75,000 on a 6-month EMI period. As of now, your spending limit has been reduced to Rs. 75,000. Each month that will get freed up by the monthly installments you payback. After six months your credit limit will be Rs. 1,50,000 again. 

Minimum amount due: Another key aspect to keep in mind is that your EMI amount will become a part of the monthly minimum payment due. There is no way to evade your monthly EMI once you have opted for it. 

Other things to consider

The option to convert the outstanding amount into EMIs may not be available for each product you buy. Also, the product needs to be of a certain amount or above it, to qualify for the EMI conversion option. Please check all these with your credit card issuer instead of making assumptions and getting stuck with big bills that you can not afford to pay.