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How do EMI schemes on credit cards work?
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How do EMI schemes on credit cards work?

EMI on credit card can be useful and convenient, but there are scenarios in which to use them.

Scenario1: EMIs come in handy when you want to buy something that your bank balance doesn’t support like a high-end laptop, smart phone or that designer blazer that you have had your eye on. You do not have to think too much, thanks to the EMIs (Equated Monthly Instalments) on credit cards.

Scenario2: You have overspent on your credit card during your festive season splurge and you are in debt, with interest rates as high as 36 - 40% per annum. Taking the EMI option on your card balance will bring your rate of interest down to 17-18% per annum, i.e. a reduction by half. This is in addition to the benefit of not having to submit a separate application or produce a set of documents.

Let’s look at some of the things you should remember when you opt for the EMI option on credit cards.

1. Processing Fee

EMI schemes are subject to a nominal processing fee, usually to the tune of a small percentage per ₹1000 of the amount you wish to convert into EMIs. Zero EMI offers are a notable exception to this rule.

2. Available Credit

Make sure you have enough credit in your card – ideally more than or equal to the amount you want to convert into EMIs, otherwise your EMI request will be rejected.

3. Temporary Reduction of Credit Limit

The moment your EMI scheme is in action, your bank will temporarily block an amount equal to the value of the purchase you made through the EMI option. Your bank will start increasing your credit limit by the amount equal to your monthly EMI as you start paying back.

Sometimes, banks also offer a loan on card based on your eligibility. This is a better option to clear your card balance as it doesn’t affect your spending capacity.

If you are on the verge of defaulting on the card payment, the EMI option will help keep the payments to manageable levels and save your CIBIL score from going down. However, you should use the EMI repayments option sparingly as it can be a burden for a prolonged period of time.

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