How Credit Card EMI Works? Easy Guide With An Example

Credit cards are one of the most important financial tools in the market. They offer multiple benefits, from providing money in emergencies to offering great rewards, cashback, and an interest-free period to repay your debt. Along with these, credit cards also allow you to repay your debt in small instalments that fit into your budget. This is called credit card EMI (Equated Monthly Instalments). Let’s explore what credit card EMI is and how it works.

What is Credit Card EMI?

When you can’t repay your credit card dues on time, you can break them down into smaller instalments and repay them over a certain period of time. This feature is called credit card EMI and works well in case of big-ticket purchases or when you usually only pay the minimum balance of your credit card dues.

Through credit card EMI, you can split a big amount into small, affordable EMIs for a tenure ranging from 3-24 months. Banks usually allow credit card users to convert any amount above Rs. 10,000 into smaller instalments.

How Credit Card EMI Works?

When you plan to convert your credit card bill into EMI, you must choose the tenure during which you will repay the entire amount. The EMI is decided based on the tenure, down payment, and interest rate. The bank usually decides the interest rate after analysing your creditworthiness. Once the EMI is estimated, it will be reflected in your monthly credit card bill.

Alternatively, you can opt for an EMI right when you are purchasing a product. Banks tie up with vendors of different consumer durable items like mobile phones, furniture, laptops, and appliances. When you purchase a product through these vendors, they give you an option to convert the purchase into EMI. Here, you have a no-cost EMI or low-interest EMI option. In no-cost EMI, the bank will let you repay your dues in a tenure you choose without charging any interest. However, you will have to pay a higher price for the product. In the case of low-cost EMI, the banks will charge interest on the product price, but the product is available at a reasonable cost. This interest will be much less than the interest banks usually charge when you miss out on paying your credit card dues.

Example on How Credit Card EMI Works

 If you purchase new furniture for your living room worth Rs 75,000. Then, you can either convert it into EMI right at the time of purchase or convert it within 30 days of the purchase to repay the dues in easy instalments.

How to Convert Credit Card Payments into EMI?

Converting your credit card payment into EMI is a simple and straightforward process. The following steps will guide you in converting your credit card bill into EMI.

First, check if your bank allows you to convert your bill into EMI. Not all banks have this facility.

Second, choose the tenure for repayment. A long tenure implies a lower EMI amount but a high overall payment. In contrast, a short tenure will result in a high EMI amount, but the overall payment will be lower.

Third, choose the EMI option. If you have an option to convert your purchase into EMI, then it’s better to opt for EMI. If you haven’t opted for EMI conversion, you can do it on your credit card issuer’s portal.

Finally, confirm your conversion, and the EMI amount will be added to your monthly credit card statement.

Costs Associated with Credit Card EMI

Converting your credit card dues into EMI comes with certain costs. Following are the charges you have to pay to avail of this option.

• Interest rate: Credit card EMI interest rate is calculated based on several factors. The tenure of the EMI primarily decides the interest rate. Apart from this, your relationship with the bank, the card you hold, and your credit history will play an important role in deciding the interest rate the bank will charge you. All major banks have an option to convert a purchase into EMI at an interest rate ranging from 12% to 15%. The interest rates are usually lower during the purchase of a product than a post-purchase conversion. Hence, you must carefully analyse all available options before selecting an option that best suits your repayment capacity.
• Processing fee: Credit card EMI is nothing but a loan that you are taking from the bank. Hence, banks charge a processing fee ranging between 1%-3% for converting your credit card bill into EMI. During festive seasons, banks usually forgo the processing fee.
• Prepayment charges: Similar to a foreclosure fee for a loan, banks charge a prepayment fee for credit card EMI. It is usually charged on the outstanding balance on the loan. Hence, it is important to check and compare the prepayment charges of different banks before going for credit card EMI.

Advantages of Converting Credit Card Bills into EMI

The following are the advantages of converting your credit card bill into EMI.

• Lower interest than credit card: When you fail to pay your credit card dues in full, banks usually charge around 36%-48% interest rate per annum, which comes to 3%-4% a month. However, if you opt for credit card EMI, banks charge you 1%-1.5% a month or 12%-18% per annum, which is almost half the cost of the former.
• Lesser interest cost: Banks charge interest on the loan’s outstanding balance. This is called the reducing balance method, and with a lower outstanding balance every month, your interest cost also reduces.
• Flexible repayment tenure: You have an option to repay your credit card dues within 24 months. Hence, you can choose any tenure based on your budget.
• No separate application needed: Despite being a loan, you need not submit a separate application to the bank to convert your credit card bill into EMI. Hence, it is a very easy loan to obtain.
• Pocket-friendly: You can split big-ticket purchases during the festive season or during certain unavoidable situations in small pocket-friendly instalments.
• Better financial planning: Converting your credit card bill into EMI will help you better plan your finances. This way, you can avoid missing out on a credit card bill, affecting your credit score and leaving a bad remark on your credit history.

How to Calculate Credit Card EMI?

 To calculate the EMI amount on your credit card, you need the loan amount, tenure, and interest rate. You just have to multiply the loan amount with the interest rate and tenure. The following formula will help calculate the credit card EMI.

EMI = P * r * (1+r)^n/ [(1+r)^n – 1]

Although the calculation is quite simple, you need not calculate EMI manually. Instead, you can use an EMI calculator. Jupiter Money’s EMI calculator will help you calculate the credit card EMI within seconds.

Let’s understand how to calculate your credit card EMI using Jupiter Money’s EMI calculator with the help of an example.

You purchase a laptop worth Rs 1.5 lakhs using your credit card and pay Rs. 20,000 as a down payment. If you convert the rest of Rs. 1,30,000 into EMI to repay back in 12 instalments, and the bank charges you an interest of 14% per annum, the EMI amount will be Rs. 11,672.

You just have to enter the loan amount, tenure, and interest rate, and the Jupiter Money EMI Calculator will give you your EMI amount and the total interest you will have to pay.

When Should You Consider Taking EMI on Credit Cards?

Using the credit card EMI option is ideal in the following situations.

• Big ticket purchases: If you are buying an appliance or a piece of furniture for your home and can’t afford it, you can convert it into EMI and pay smaller monthly instalments.
• Exceed your monthly budget: If you exceed your monthly budget and might face difficulty during the next month, then it’s better to convert your purchase into an EMI.

Things to Consider When Converting Your Credit Card Payment into EMI

You must convert your credit card bill into EMI only after considering the following factors.

• Eligibility: Not all banks have the facility to convert credit card dues into EMIs. Hence, it is better to check for this feature before making the purchase.
• Interest: When you are converting your credit card bill into EMI, interest is unavoidable. The higher the tenure, the higher the interest cost will be.  
• Processing fee: Although you don’t need any separate application to convert your credit card bill into EMI, the banks charge a small processing fee, which is usually unavoidable until and unless the bank decides to forgo it.
• Temporary reduction of credit limit: When you convert your credit card bill into EMI, the credit limit available to you is reduced to the extent of the EMI.
• Online or merchant purchase is cheaper: Purchasing products online on EMI or at the merchant is cheaper than converting your bill into an EMI. This is because the interest rate in such cases is slightly lower than converting your credit card bill into EMI.
• High penalty: Credit cards levy a heavy penalty in the form of interest for missing out on a bill payment. Hence, make sure you can afford the EMI before making the purchase. Moreover, your credit score will be impacted if you fail to pay an EMI.

Conclusion

Credit card EMI is an excellent way to ensure you can afford big-ticket purchases. You can spread out the cost of the product over a period of 24 months and pay a certain amount monthly. However, using too much of this feature can create a dent in your finances and savings. Moreover, credit card debt is very expensive. Hence, it is best to use credit card EMIs responsibly.

Frequently Asked Questions

How does credit card EMI work?

When you purchase any item worth Rs 10,000 or more using your credit card, you can convert it into EMI. This way, you can repay the dues in easy and affordable instalments.

How is EMI deducted from credit cards?

The EMI on your credit card is reflected in your credit card statement, which is generated at the end of your billing cycle. You can pay the same when you pay your credit card dues. Alternatively, you can also set an auto-debit option to ensure you never miss out on an EMI payment. 

Is it good to use a credit card for EMI?

You can convert your credit card to EMI to reduce your financial burden and not affect your budget. However, overusing it can affect your savings in the long term.

Can we pay credit card EMI at once?

Yes, you can pay credit card EMI early. However, banks charge prepayment or foreclosure fees, which are usually a fixed percentage of the outstanding balance.

Is EMI cheaper than regular credit card payments?

Banks give an interest-free period for you to repay your credit card dues. During this period, they will not charge any interest. In the case of credit card EMI, the interest is already charged. Hence, regular credit card payments are cheaper than credit card EMI as you can save 12-18% in interest payments during a year.

How much are credit card charges on EMI?

Credit cards usually charge interest at 12-18% per annum or 1-1.5% monthly. They also charge a processing fee of 1-3% on the loan balance and a foreclosure fee if you prepay your EMI.