Does It Make Sense To Convert Your Credit Card Dues Into EMIs?

You can convert big-ticket purchases into EMIs in two ways:

1. Merchant EMI

Card providers have collaborated with retailers and online shopping websites to provide the facility at the time of purchase. While making payment using your card, you can choose the EMI option along with a tenure of your choice. EMI will be created and you will receive an email with complete amortisation schedule of the loan. The EMI will be shown in your monthly statement.

2. Post-purchase EMI Conversion

If you could not create an EMI at the time of purchase or you chose a merchant who is not a partner of the bank, you can still convert it into EMIs. Card issuers promote it as an additional advantage on the card. For example, HDFC has named this facility Smart EMI whereas SBI Card calls it Flexipay.

When we talk about converting your credit card dues into EMIs, we refer to this facility. Such EMI facility usually charges a higher interest rate as compared to those created at merchant level. This EMI is also included in your credit card statement every month and you will receive an amortisation schedule for the same.

The various fees & charges associated with Credit Card EMI facility are:

Interest Rates – Credit card EMI interest rate is dependent on the credit card, relationship with the bank, etc. Usually, interest rates on merchant EMIs are lower than that on the post-purchase conversion. The table below shows the comparison for some leading credit card issuers:

The interest rates shown above are sourced from Amazon.in. Different rates may be offered on other platforms. Also, banks reserve the right to change the rates without prior communication.

Processing Fees – Credit card providers may also charge a processing fee to convert transactions into EMI. It can range from 1% to 3% of the transaction amount.

Prepayment Charges – Banks might charge you a pre-payment fee if you wish to clear the dues before the end of the tenure. You can expect to be charged about 3% of the outstanding amount at the time of clearance. Moreover, you might have to pay off the interest on a pro-rata basis as well.

Goods & Service Tax (GST) – GST at 18% will be applicable on all fees and charges.

Given below are a few important points to consider before converting your credit card bills into EMIs or when opting for a merchant EMI.

Choosing the Correct Tenure – Banks typically offer a low-interest rate on long term EMIs.  For example, you might be charged 20% p.a. on the tenure of 3 months but 18% p.a. on a yearly tenure. If you choose the 18% p.a. because it charges a lower rate of interest then you will end up paying more. The below-given illustration will show you how.

Let us suppose the purchase was worth Rs. 10,000.

Now, interest accrued on 3 month plan will be:  Rs. 493.15 [10,000*(20%/365)*90]

While interest accrued on 12 month plan will be: Rs. 1,800 [10,000*(18%/365)*365]

As you can see just because the bank is offering a lower interest rate on a longer tenure won’t mean you will save money.

Right Credit Card – If you have multiple cards then compare interest rates offered on them. Banks consider many criteria when deciding on the rate of interest which may include, loyalty to the bank, income, type of credit card etc. Sometimes, the same bank may charge different fees on different cards.

Reward Points/Discounts – Converting purchases into EMI might result in loss of reward points or other discounts/offers which you might have otherwise availed. If the offers provided are significant then consider saving money for the purchase instead of converting them into EMIs.

Blocked Credit Limit – When you use the EMI facility, the purchase amount is blocked against the credit limit. So your available credit limit is lowered till you pay off the EMIs. The credit limit increases after every payment and is equivalent to the amount paid. However, if you make an upfront payment for the purchase in full, the entire purchase amount will be added back to your available limit.

Credit Score – We have seen above how EMI conversion blocks credit limit. Therefore, customers should be aware that this may reduce their credit score. This happens because the credit utilisation ratio jumps up. Credit Utilization Ratio is the ratio of purchases made against the credit limit of the card. A higher Credit Utilization Ratio might result in a drop in credit score.

Timely Payments – If you have opted for EMI conversion, you must ensure to pay the full outstanding amount (including the EMIs) by the due date. Missed payments will attract late fee and finance charges which, in turn, could create a debt spiral.

The answer depends on whether you can afford to pay for the purchase in full by the next due date or not. Converting big-ticket purchases into EMIs is one way to clear the credit card dues with minimal impact on your credit score. However, you shouldn’t make applying for EMI a regular habit as this will drain your savings.

If you are exploring options to clear a huge debt or consolidate multiple smaller debts, you can also consider applying for a personal loan.

Consider Reading: Compare Personal Loan Interest Rates in 2020

Returns are usually quite simple. Customer returns an item and the merchant initiates the refund. The amount is credited back into the account within 4 to 5 working days. However, things get a little complicated in case of refunds on items purchased through EMI. Here’s how:

Returning an item before EMI conversion has been processed.
In this scenario, the full amount is refunded back to the customer without hassle.

Returning an item after EMI conversion has been processed.
In this scenario, you might not get the full amount back. You will end up paying GST, foreclosure charges (Pre-payment charges), and interest.

Do note that in the case of No-Cost EMIs the full amount is refunded.

Suggested Read: How Credit Card Returns and Refunds Work?

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