Want to own the latest smartphone but can't afford it? Use the EMI option to buy it!" Such enticing offers are very common, especially during festivals. And converting big-ticket purchases to bite-sized instalments does make a lot of sense in managing liquidity.
However, the rules of wise money management, responsible borrowing and financial discipline do apply on EMIs as well. So, if you too are planning to buy something big this Diwali using your credit card's convenient EMI option, consider going through a few critical pointers.
Credit card EMI shopping is like a loan that you have to pay with interest over time in instalments. So, make sure you have a clear repayment plan in place to ensure you do not miss a single EMI during the loan tenure. Doing so can lead to debt accumulation and an impacted credit score. Also, don't breach your spending capacity just because you have an EMI option.
Mind the processing fee
Depending on your card variant, the EMI processing fee could be 1-3% of the amount disbursed to buy the item. While this may not seem to be a big amount, you should factor it in as this gets added to your EMIs. Read your card's fineprint or reach out to your bank to get more clarity.
Check the interest on EMIs
Credit card providers at times offer lower interest rates and even zero processing fee on EMI transactions with eligible purchases. The interest levied on EMI transactions is usually lower than the interest you pay on regular credit card debt. The interest rate on credit card-linked EMIs is 12-24% per annum. So, get clarity on the interest that you'll need to pay and compare it among your different credit cards to save on the interest outgo. Also, check for festive offers on EMIs extended by banks and merchants to increase your savings.
Check for pre-closure penalty
At times, you may not want to continue paying EMIs throughout the loan tenure and be inclined to pay off the entire outstanding in a single shot. However, doing so may attract a pre-closure charge-often up to 3% of the outstanding amount-depending on the credit card provider's terms and conditions. As such, check if there's any pre-closure charge levied by your card provider before you sign up for an EMI plan. Pre-closing the EMIs may help you save on interest payout, but you'll have to shell out a pre-closure penalty.
Your credit card's credit limit gets blocked to the extent of the total disbursed amount the moment you make the purchase and gets freed up as you pay the EMIs. This should be another important consideration as this might impact your plans for other credit card spends.
Savvy credit card usage lies at the heart of maximising its benefits. And it always helps you to save a bit more if you put in some effort in knowing how exactly your card benefits, like the EMI option, work. So, if you don't want to exhaust a major portion of your savings or liquidate your investment returns to make a big-ticket purchase this Diwali, your credit card-linked EMI option is sure to come in handy. You can try to further sweeten the deal by going for particular merchants giving special offers and discounts on your chosen products. But don't exceed your budget even if you go for the EMI option, know the associated charges, and pay your card bills on time every month to avoid additional interest penalties.
The author is CEO, BankBazaar.com