Credit Card EMIs: A boon or a trap? Disadvantages of EMI option in credit card.

Be extra careful of spending through your credit card as whatever is not necessary might be procured at double the price due to high interests.

Credit Card EMIs are appealing but are they really beneficial

When you begin using your credit card for the first time you must understand how to use it and make it work for you. The advantage of having a credit card is that it is an easily acceptable means of purchasing almost anything. Some of them help you earn points that get you discounts on your purchases. CIBIL scores help you get a lot of financial benefits and credit cards provide precisely that leeway. 

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Important Pointers for Credit Card Users

Credit cards help in your CIBIL rating and benefit you in the long run as you are able to create a credit history.
They are not linked to any account you own, and are not like debit cards. So a credit card helps you to borrow money for a short period and repay as soon as possible to avoid interest. 
In order to understand and use credit cards effectively, it is important to know how the interests and charges of the credit card are levied. 
Understanding how Credit Cards work

When you use a credit card to buy something you are indirectly borrowing money from the credit card company. So, the money though under your care does not belong to you. You should make sensible purchases that matter rather than buy and regret later borrowing money for it. 

Suppose you have a credit limit of 3 lakhs after you decide to take a credit card. You think about using the card for two very important transactions which you need for the proper functioning of your family in that month. Suppose you decide to buy a much-needed mobile phone as you have to replace your old phone. You decide to spend 10,000 on the new phone. Then you think of buying a refrigerator for Rs. 80,000. For the cost of the refrigerator, you decide of placing it under 6 monthly EMI payments. Your total credit as a result of these two transactions reduces to Rs. 2,10,000. At the beginning of the month, you need to pay the bill where the transactions would show as follows. The cost of EMI for the Fridge will be 80,000 /6 months EMI = 13,350. Plus the full amount for the cost of the phone = 10,000 = 23,350

The credit card bill for the following month would read as follows:

The Total bill amount payable = 23,350. So when you pay this amount at the beginning of the month your credit limit will increase to 2,10,000 + 23350 = 2,33,350. So this is how the method of increasing and decreasing the credit limit begins. Only the amount you pay fully for is not charged any interest. But for the transactions where the EMI amount is paid, is charged interest, and the miscellaneous charges as per the rules of the issue of the cards. The chaining process continues in this manner. It is better if the card is totally paid off during a month to make the bill zero payable. This is to avoid further interests.

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It is important to know that the interest paid per month for a credit card varies between 2.5% to 3.5% per month. So, for a 1 lakh loan, your cost payable after interest is = 1,02,500. The minimum amount due = 5% of the sum total of all costs, in this case = 5% of 1,02,500 = Rs. 5, 125. To avoid accruing the interest, you should consider paying the full amount due. The next option would be to pay the minimum amount plus an additional amount. The more the amount repaid the lesser the interest charges on the reduced amount.

Credit card companies receive a bonus on their dues from you when you make late payments, or violate the terms and conditions of the card’s other terms and conditions. 

The following terms are to be known by all credit card users.

  • Interest: This is charged on the balance amount due if the credit card is not paid in full.
  • Credit Limit: You cannot spend beyond the upper limit set by the card company. Automatically your transaction above that figure will be canceled.
  • Billing Cycle: The monthly billing cycle connects the period between one statement date to another. All transactions and charges will be recorded in the bill or statement. 
  • Minimum Amount due: Please pay at least this amount to avoid penalties and charges. 
  • Balance: This is the amount you purchased, but haven’t returned to the credit card. 
  • Credit utilization ratio: this is the amount that you spend against the credit limit of your card. The higher the purchase ratio to the limit, the lesser the credit score. You should not go above 25-29% of the ratio. 

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