Friday, 5 May 2017

Things You Must Know Before Starting EMI on a Credit Card

The main motive of every business is to maximize profits, which is done by maximizing the sales. However, consumers don’t always have the kind of money they need for big purchases such as motorbikes and home entertainment systems. To help these customers, and themselves in the process, the banks offer EMI schemes on their credit cards, often when they have tie-ups with certain companies.
An EMI purchase allows you to buy the product of your choice with your credit card, and you can pay the full price in small instalments over a certain period of time such as 6 months or 9 months etc. On the surface, this arrangement certainly seems convenient and affordable. However, is it actually true? Is there no catch at all?
Well, they say when something seems too good to be true, it is. In other words, yes, EMI purchases have certain extra costs that you must be wary of. Thus, if you are going to buy something with an EMI scheme, make sure you are aware of the following things:
First things first, let’s talk about the different types of costs that you have to bear in an EMI scheme. These are:
The Cost of Interest
Let’s say you want to buy an iPhone worth Rs. 80,000. Since you can’t afford to pay the full amount in one go, you decide to purchase though the EMI scheme. You contact the seller and they tell you that you can purchase the phone with a 6 month EMI plan after making a down payment of Rs. 8,000. You think you will be paying the EMIs at Rs. 12,000 each. However, in reality the actual EMI could easily be Rs. 12,500 or more. This is because in EMI scheme you have to pay interest apart from the base price. 
Extra Costs
Apart from the interest rate, many credit card companies also charge a processing fee when you make a purchase with an EMI scheme. It is usually a small percentage of the full transaction amount. However, when the cost of the product is high then even the processing fee can be huge. For instance, to buy home entertainment system of Rs. 1.5 lakhs you will have to pay Rs. 1500 as processing fee (assuming the rate is 1%).
 Pre-closure Fine
If you decide to pay the full remaining amount of a product under EMI scheme before the completion of the total number of EMIs then you may have to pay a fine called the pre-closure fine. Usually it ranges between 2% to 3% of the outstanding principal amount.
 If you want to make the most of EMI scheme offered by credit cards companies then pay heed to the following tips:
·        Shorter Tenure: Since most EMI purchases come with high interest rates, it is best to choose shorter tenures. This is because you will have to pay less interest this way.
·         Reading T & C: Make sure you go through the terms and conditions set by your credit card provider. It is possible that you may not need to pay pre-closure fine, which can be good for you if you decide to repay the EMIs before the actual due date.
·        Pick a Good Time: Credit card companies and sellers both often roll out interesting offers during festive seasons such as Diwali, Christmas, etc. They may offer zero interest EMI purchases, or purchases with processing fees, etc. Thus, it’s best to buy during such times.
When you buy using your credit cards, there is one more thing you should be really careful about, which is your CIBIL score. The way you handle your credit directly affects your CIBIL score. Thus, be sure to pay your EMIs on time and avoid defaulting at all costs.

Having a good CIBIL score is important if you want to get loans easily and at low interest rates in the future. A good CIBIL score also gives you a peace of mind. So, use your credit cards wisely, and make purchases only when truly necessary.

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