The Hidden Costs of Credit Card's "Convert to EMI" Option
Credit Card EMI Conversions: Understanding the Pros and Cons
Key Figures:
- Rs 90,000: Average credit card bill
- Rs 8,000 - Rs 9,000: Monthly EMI payment
- 35%: Annual credit card interest rate
Credit Card EMI Conversions: A Double-Edged Sword
Banks offer credit card EMI conversions as a convenient solution to large bills, but the decision is often about cost rather than convenience. When a credit card bill is converted into EMIs, it essentially turns into a short-term loan, adding interest and a small processing fee. The monthly payment may look lighter, but the total repaid can be higher than the original bill.
When EMI Conversions Make Sense
EMI conversions can be beneficial in situations where a large medical bill or unavoidable travel expense has depleted cash reserves. In such cases, converting the bill into a fixed EMI stops compounding interest and forces the debt into a defined repayment schedule, acting as a temporary financial bridge.
Hidden Costs of EMI Conversions
Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile
Once a bill is converted into EMIs, the credit limit on the card effectively shrinks until the instalments are repaid. Additionally, the final cost of the purchase can be higher than the original amount, with interest and fees adding up over the entire tenure. This difference is the price of spreading the payment.
When EMI Conversions May Be Unnecessary
If the bill looks large but incoming income or cash flow is expected in the next few weeks, converting to EMI may simply add avoidable interest. Many cardholders also convert bills out of habit, which can lead to unnecessary interest charges. In such cases, paying off the bill immediately almost always costs less.
The Bottom Line
Credit card EMI conversions are not a trap, but they should not become routine either. They work best when a genuinely unexpected expense leaves you short of cash and you need time to repay the amount. It is essential to carefully consider the costs and benefits before opting for an EMI conversion.
Investor Takeaway
Be cautious of the potential long-term costs associated with converting large credit card bills into EMIs.
More in General
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Missing a Single EMI Payment Can Adversely Impact Credit Profile
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