Reduce interest, pay EMIs

Issuers allow you to convert your credit card purchases to EMIs, but it comes with strings attached.

There are various offers available on a credit card and one of the most interesting is the equated monthly installment (EMI) option. This is a payment option available for the individual. Here are some areas that need attention in the process of conversion of the payment into an EMI.

EMI OPTION
There are various ways in which the payment on a credit card can be made. One is to make the full payment by the due date, which will not invite any interest charges. The option is to pay only a part of the amount and pay interest on the remaining portion till it is repaid. And now there is another choice, of paying in equated monthly instalments (EMI). This gives rise to a situation where the amount is paid off in parts, just like a loan. Just to give a very simple example, if there is an outstanding amount of Rs 7,200, then this might be converted into payments of Rs 1,200 for six months.

The first thing to ensure in the entire process is to find out if your issuer provides this option. Such a facility is not available at all times. There are situations where only specific purchases from select stores would be eligible for the EMI benefit. For example, purchase of a refrigerator from a big retail chain might be eligible for the benefit but not if the same brand is bought from another distributor. In other cases, even within a particular store, only specific purchases (like suits or bridal wear, for example) are eligible for conversion into EMI for repayment.

Another condition that often triggers the EMI option is that there has to be expense above a specific limit. This limit is usually Rs 3,000-5,000, so an expense above this limit at a specified store or during a decided time period fixed by the card-issuing bank is eligible. This is different from a situation where an existing outstanding balance can be converted to an EMI repayment. In many cases, a decision about EMI repayment has to be done at the time of making the expense itself, though some promotions also allow conversion of the existing outstanding into EMI later. Once the eligibility is determined, the next part is to ensure the conversion is beneficial and for this, several points need attention.

NO INTEREST
The best form of the EMI option is where there is no interest charged on the payment. This kind of benefit is present when the bank wants the consumer to spend more through additional purchases and hence such offers will mostly be available on new purchases under a specific scheme. The calculation here is very simple, as the total payment is broken up into the required parts. The key question is the time period for which the payment will be spread out. A six-month or 12-month repayment period is good, as this will provide a long credit period. So, an expense of Rs 12,000 spread over 12 months will lead to an EMI of Rs 1,000 a month, that will come in each month's credit card bill. Here, the saving is in the form of interest expense that would have to be paid because of the stretching out of the payment.

This is beneficial only if the overall price is not higher than normal. For, in many cases, the discount on the item is taken away, so the Rs 12,000 item should not be available for a lesser amount of Rs 10,000 without the EMI payment option.

LESS INTEREST
There are often situations where some amount of interest is actually charged on the process of splitting the payment into various instalments. To ensure the benefit flows to the individual, the rate of interest would be less than the normal rate of return charged by the credit card issuing bank. Most EMI rates are in the range of 1.25-1.99 per cent per month, which in most cases is lower than the normal rate charged. For example, if the rate of interest on the card is 2.95 per cent, then the payment of Rs 10,000 will grow to Rs 11,905 at this rate of interest. Instead of this, if the EMI payments along with interest come to Rs 10,750, then this is a better option for selection.

Another thing to watch for is that similar time periods have to be considered. So, if you are planning to pay off the expense amount in six months and the EMI option is available only for 12 months, then it could mean unnecessary higher interest even when the rate charged is lower. Each case would need to be considered separately for the extent of the savings earned by the cardholder. This should not be the first option chosen, because there is some interest cost that has to be paid and, hence, there is a burden put on the individual.

The writer is a certified financial planner