How credit card EMI works are you planning to buy a big-ticket item but don't have enough cash on hand? Credit card EMI could be the solution you need. EMI stands for Equated Monthly Installment, a payment option that allows you to convert your credit card purchases into easy-to-pay monthly installments.
In this article, we'll explain how credit card EMI works, its advantages and disadvantages, and how to choose the best option for you.
What is a Credit Card EMI?
Credit card EMI is a payment option that allows you to convert your credit card purchases into monthly installments. It works like a loan, where you borrow money from your credit card provider and pay it back in installments over a set period of time. The EMI amount includes the principal amount plus interest and any processing fees. Credit card EMI is usually offered for big-ticket purchases like electronics, appliances, and travel bookings.
Two Types of EMI Offered by the Banks
In addition to the standard EMI, which we discussed in the previous section, banks also offer two other types of EMIs on how credit card EMI works bills: Flexi EMI and No-Cost EMI.
Flexi EMI
Flexi EMI is a type of EMI that allows you to choose the amount you want to pay as EMI. Unlike standard EMI, where the EMI amount is fixed, in Flexi EMI, you can pay a minimum amount due or a higher amount based on your financial situation. The interest is charged on the outstanding balance.
For example, if you have a credit card bill of $10,000 and you choose to pay a minimum amount due of $2,000, the remaining amount of $8,000 will be converted into a Flexi EMI. You can choose to pay the entire amount in one go or in multiple installments over a period of time. The interest will be charged on the outstanding balance until it is fully repaid.
No-Cost EMI
No-Cost EMI is a type of how credit card EMI works where the interest cost is borne by the bank instead of the customer. This means that you can avail of the EMI facility without paying any interest. However, this facility is usually available on high-value purchases such as electronics and appliances.
For example, if you want to purchase a refrigerator worth $20,000 and choose to pay for it through a No-Cost EMI for 12 months, the bank will bear the interest cost. You will need to pay the principal amount of $20,000 in 12 equal installments of $1,666.67.
How Does Credit Card EMI Work?
EMI Calculation
EMI is calculated based on the principal amount, interest rate, and tenure. The higher the principal amount and interest rate, the higher the EMI amount. The tenure, or the number of months you take to repay the EMI, also affects the EMI amount. The longer the tenure, the lower the EMI amount, but the higher the interest cost.
EMI Interest Rates
Credit card EMI interest rates vary depending on the credit card provider and the merchant. The interest rate can range from 12% to 24% per annum. Some credit card providers also offer 0% EMI schemes for select merchants or purchases, but these may come with a catch like a processing fee or a higher interest rate after a certain period.
EMI Tenure
The tenure for how credit card EMI works can range from 3 months to 24 months, depending on the credit card provider and the merchant. Some providers may also offer longer tenures for select merchants or purchases, but these may come with a higher interest rate.
EMI Processing Fees
How does credit card emi work may come with a processing fee, which is usually a percentage of the principal amount. The processing fee can range from 1% to 3% of the principal amount, depending on the credit card provider and the merchant. Some credit card providers also waive processing fees for select merchants or purchases.
Advantages of Credit Card EMI
Easy Repayment
How credit card EMI works offers a convenient way to pay for big-ticket purchases without putting a strain on your finances. You can spread the cost over several months, making it easier to manage your budget.
No Collateral Required
Unlike traditional loans, credit card EMI does not require any collateral or security. This makes it easier to Unlike traditional loans, credit card EMI does not require any collateral or security. This makes it easier to avail, especially if you do not have any assets to pledge.
Low Processing Time
How does credit card emi work has a shorter processing time compared to other loans. You can usually convert your purchase into EMI within a few minutes, making it a quick and hassle-free option.
Can Help Build Credit Score
If you make timely payments on your how does credit card emi work, it can help improve your credit score. Your credit score is a measure of your creditworthiness, and a good score can help you avail better loan terms and interest rates in the future.
Disadvantages of Credit Card EMI
High-Interest Rates
How credit card EMI works comes with a higher interest rate compared to other loans like personal loans or car loans. This can increase the overall cost of your purchase and make it more expensive in the long run.
Hidden Charges
Credit card EMI may come with hidden charges like processing fees, pre-closure charges, or late payment fees. These charges can add up and increase the overall cost of your purchase.
Penalty for Late Payments
If you miss an EMI payment, you may have to pay a penalty or late payment fee. This can affect your credit score and also increase the overall cost of your purchase.
Limited Options
How credit card EMI works may not be available for all purchases or merchants. You may also be limited to a few tenure or interest rate options, which may not be suitable for your budget or repayment capacity.
How to Choose The Best Credit Card EMI Option
When choosing a credit card EMI option, consider the following factors:
Interest Rates
Compare the interest rates offered by different credit card providers and merchants. Look for 0% EMI schemes, but be aware of any catch like processing fees or higher interest rates after a certain period.
Tenure
Choose a tenure that is suitable for your repayment capacity. A longer tenure may result in lower EMI amounts, but it can also increase the overall interest cost.
Processing Fees
Compare the processing fees charged by different on how credit card EMI works providers and merchants. Look for offers that waive processing fees or offer lower fees for select merchants or purchases.
Pre-Closure Charges
Check if there are any pre-closure charges if you want to pay off your EMI before the end of the tenure. Some credit card providers may charge a penalty for pre-closure, which can increase the overall cost of your purchase.
Understanding Credit Card EMI
Credit card EMI is a facility offered by banks to convert your credit card bill into EMIs. The amount due on your credit card bill is converted into smaller, fixed monthly payments, which are easier to manage. However, you need to pay interest on the EMI amount.
Calculation of EMI on Credit Card Bill
The EMI on your how credit card EMI works bill is calculated using the following formula:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where:
P = Principal amount
R = Rate of interest per month (calculated as Annual Percentage Rate (APR)/12)
N = Number of months
To understand this better, let's take an example. Suppose you have a credit card bill of $10,000 and you want to convert it into EMIs for 6 months at an interest rate of 18% per annum. Here's how you can calculate the EMI:
P = $10,000
R = 18%/12 = 1.5% per month
N = 6 months
EMI = [10,000 x 1.5 x (1+1.5)^6]/[(1+1.5)^6-1]
EMI = $1,740.41
Therefore, your monthly EMI for 6 months will be $1,740.41.
Conclusion
Credit card EMI is a convenient option to finance big-ticket purchases without putting a strain on your finances. However, it comes with a higher interest rate and hidden charges that can increase the overall cost of your purchase. When choosing a credit card EMI option, consider the interest rates, tenure, processing fees, and pre-closure charges to make an informed decision.
That's all in this blog and hope you understand how credit card emi works. Share your thoughts in the comment section.
FAQs
How is EMI charged on credit card?
EMI (Equated Monthly Installment) on credit cards is charged based on the principal amount borrowed, the rate of interest, and the duration of the repayment period.
Does EMI gets deducted automatically?
Yes, EMI (Equated Monthly Installment) payments for credit card dues are usually deducted automatically from the cardholder's bank account.
What happens if I miss an EMI payment?
If you miss an EMI (Equated Monthly Installment) payment on your credit card, the credit card issuer may charge you a late payment fee and interest on the outstanding balance.
Can credit card EMI affect my credit score?
Yes, credit card EMI (Equated Monthly Installment) payments can affect your credit score.