Understanding Credit Card EMI: A Beginner's Guide

Understanding Credit Card EMI: A Beginner's Guide


As Credit Cards gain popularity in India, many users opt for the convenience of converting big-ticket purchases into easy monthly instalments or EMIs. While Credit Card EMIs can help manage cash flows, it's crucial to understand how they work to make informed decisions. Learn the fundamentals of Credit Card EMIs, their benefits, and essential aspects like prepayment and foreclosure.

What Is Credit Card EMI?

EMI stands for Equated Monthly Instalment. Credit Card EMI is a facility that allows individuals to convert significant Credit Card transactions into smaller monthly payments spread over a fixed tenure, typically ranging from 3 to 24 months. Instead of paying the entire amount at once, a buyer can repay it in bite-sized instalments, making the purchase more manageable.

How Does Credit Card EMI Work?

When one makes a large purchase on their Credit Card, they can choose to convert it into EMIs at the point of sale or later through the Credit Card issuer's app, website, or customer care. The transaction amount is divided into equal monthly instalments based on the chosen tenure, which includes a portion of the principal and the interest component. Each month, the EMI amount is added to the Credit Card bill until the loan is fully repaid.

The EMI amount and schedule are predetermined based on the following factors:

  • Principal amount (purchase value)
  • Interest rate (differs across banks)
  • Repayment tenure (typically 3, 6, 9, 12, 18, or 24 months)
  • Some issuers may charge a one-time processing fee of 1-2% of the transaction value. It's crucial to factor this in when calculating the total cost of the purchase.

Example : Suppose Mr A wants to buy a laptop worth ₹50,000 using his Credit Card. If he opts for a 12-month EMI plan at 14% interest per annum, his monthly EMI would be approximately ₹4,600. This makes the purchase far more affordable than a single payment of ₹50,000.


Benefits of Credit Card EMI

  1. Affordable Instalments : EMIs break down significant expenses into bite-sized repayments that are easier on the wallet.
  2. Flexible Tenures : With tenures ranging from 3 to 24 months, individuals can choose a payback period that suits their financial situation.
  3. Instant Approval : Unlike Loans that involve paperwork and waiting, Credit Card EMIs can be set up instantly at the point of purchase.
  4. Builds Credit Score : Timely EMI payments reflect positively on the card user's credit report, improving their credit score over time.

Prepayment and Foreclosure of Credit Card EMI

Prepayment means paying more than the scheduled EMI amount. This can help reduce the overall interest outgo and enable faster loan repayment. Foreclosure is paying off the entire outstanding amount before the tenure ends, becoming debt-free immediately. Most banks allow EMI prepayment and foreclosure. However, some key factors to consider are:

  • Prepayment/Foreclosure Charges : Banks usually charge a fee of 2-5% of the outstanding principal for prepayment or foreclosure. For example, to foreclose a ₹50,000 balance, a 3% charge would mean paying an additional ₹1,500.
  • Interest Savings : Prepaying or foreclosing can save on future interest. In the above example, if one forecloses after 6 EMIs, they save the interest component for the remaining 6 months.
  • Terms and Conditions : Banks may specify a minimum period before which foreclosure isn't allowed or levy higher charges for early foreclosure. Carefully read the EMI terms before proceeding.
  • Refunds and Cashbacks : Merchant refunds or cashback related to the purchase will be credited to the card account. You will need to adjust them against EMIs or outstanding balances.

Smart Strategies for Prepayment and Foreclosure

It's essential to factor in the following aspects when deciding to prepay or foreclose to see if one is saving money in the process:

  • Do a cost-benefit analysis comparing the interest savings with applicable fees to see if prepayment or foreclosure is worthwhile.
  • If one receives a windfall or bonus, foreclosing high-interest EMIs can result in significant interest savings.
  • If individuals have surplus cash, they can maximise savings by building an emergency fund first and then using the remaining sum to prepay high-cost EMIs.
  • To save more on interest, make a full prepayment or foreclose in the initial months of the EMI tenure.
  • Choose EMI plans with low prepayment and foreclosure charges to minimise fee outgo. Check out our Credit Card EMI Calculator to calculate the EMI.

Conclusion

Credit Card EMIs are handy financial tools when used responsibly. One can make savvy decisions and enjoy greater purchasing power by understanding how EMIs work, their benefits, and the nuances of prepayment and foreclosure.

Take advantage of Federal Bank Credit Card EMI's affordability and simplicity. This allows individuals to make more flexible and cost-effective purchases.