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Does opting for EMI on credit card affect CIBIL score?

The very first criterion which determines the eligibility for any type of loan is a credit score. The credit score can be defined as a three digit numeric summary of the entire credit history of an individual which is generated by CIBIL. CIBIL stands for Credit Information Bureau, India Limited. This information is based on the monthly information that is provided to CIBIL by the various banks and the different financial institutions. Generally, an individual’s credit score appears between the range of 300 to 900.

When an individual applies for any kind of loan and submits the filled loan application form to a bank, the very first thing that the bank will check is the credit score of the individual and the credit history. If the person has a bad credit history and the credit score is relatively low, then the bank may directly reject the loan application. Rather, if the person has a good credit score, the bank would immediately pass the loan application and go ahead for further formalities. Provided that the CIBIL score or credit score is the primary and major deciding factor in order to help the person get the loan application processed, this is very important to know the factors which affect the credit score of an individual and take the necessary steps accordingly to improve the same if it is below the expectation.

What one must know before they go For an EMI on their Credit Card?

The digital payments are said to be the future of transactions in our country India. The young and the old Indians are slowly getting accustomed to this norm aspect. Now more & more people are choosing to use their plastic money over hard cash or real currency. No matter how big the volume of the transaction amount is, when given an option, the people will generally opt to use the credit cards for making the payment.

Some of the interesting reasons to do so are mentioned below:

  • By using a debit card the individual account gets debited immediately.
  • Whereas in a credit card, the bank provides a credit period to the customer during which the money balance in the bank account earns good interest. The card transactions help the customer earn loyalty points. These points can be redeemed for an array of benefits.
  • At times, customers are offered to get an additional discount by using the credit card, in case if there is an offer on the card; for example a cashback offer. And obviously, with every additional credit card comes a greater purchasing power.
  • So, one would agree that most of the people spend by using their credit cards also for high-value purchases. Now the important question is that should one opt to convert the high-value transactions (the ones which exceed an amount of Rs. 5000) into EMIs? It is important to examine its pros and cons in detail.

Suggestions in Favour of opting for EMI

  • Converting the large amount into an EMI makes it easier to manage, since the cardholder is not loaded with the burden to pay the entire amount off in just a single month. The large amount is split up over a medium to the large period of time. For example, say three-month-long, six months long or twelve months long The EMI option is available depending on the value of the total transaction.
  • Generally, the credit card companies levy a heavy interest rate on the outstanding bill amount. It may be something at the rate of up to 46%. But, by having an EMI as an option the rate of interest is considered to be much lower. It is something in the range of 11% and 18%.
  • One can save the money by keeping it in the bank account, where it can earn good interest continuously, while the repayment of the card bill is being done in equated monthly installments.
  • Aids in gradually building up the CIBIL score of an individual. Some of the people may find it tough to pay up a large amount in just a single shot. There might be a possibility of a default due to the lack of availability of funds to repay the debt, and not due to the lack of an intention to repay. Opting for an EMI helps avert such a disastrous situation for the person in the picture.

Let us take an example to understand this in a better way. The Newlywed Meesha observed, that “one need not invest a large amount of money in costly personal loans or to mortgage an asset with the bank in order to compensate for the requirements.” At the time of buying new furniture for their house, Raj and Meesha had been contemplating taking a personal loan that may have costed them to be around 19%. Rather they used their credit card for paying off their bills and other expenses, earned reward points and converted the large value transactions to easy EMIs at a relatively lower rate of 14%.

Suggestions in against opting for EMI

All that glitters is not gold. This is a very true adage, especially in the case of EMI which affect an individual's CIBIL rating or credit score. The factors going against opting for an EMI are as follows:

  • An EMI blocks the credit limit of the individual to the extent of the amount of purchase. For instance, Ramesh had bought an iPhone 8, the cost of which was Rs. 75, 000 in October, 2018 by using his Credit Card. The credit card that he owned had a limit worth of Rs.1 lakh. Now due to this purchase, the available limit of his card is reduced to Rs. 25K. Thus, he requested the concerned authorities to convert the amount to EMIs of Rs. 7, 670 for a total of 12 months.
  • Now every month, his credit card limit will be released to the extent of Rs. 7,670 only. This indicates that the limit of the card is blocked for the 12 months till the repayment is fully done. Also, Ramesh could not use the card to place any other high-value order until a significant limitation of the credit card has been freed.
  • The Banks charge a one-time processing fee from the credit card holders to convert the large value transaction into an EMI. This fee is generally a percentage of the total transaction value. Most of the people fail to take into consideration this fee while calculating the interest to be paid. In reality, the net cost of converting the large value transaction into an EMI is relatively higher.
  • It is definitely a better choice to opt for a smaller loan, like a loan against the FD, or a small personal loan or choose a gold loan at a relatively lower rate of interest and then pay off the entire credit card bill in just a single go. This would definitely be a cheaper option and even provide an individual with peace of mind, rather than the lingering worry every month.
  • Also, not all of the credit card companies offer conversion of large amount transactions to EMI option. One must always check up with the bank or read their product checklist carefully in order to see if the card issuing bank would allow a customer to convert the large amounts into EMIs.
  • Some of the banks might allow the people to convert the large value transactions to EMI but they might not allow the individuals to repay it. But still, if the individual insists, the banks might allow the person to foreclose their EMI upon the payment of an additional fee which may be of 1% or 2%.

Conclusion

Thus, converting a large transaction to an EMI is, undoubtedly, a very alluring option. But one must consider that whether it is the best option or not. Thus, one can only conclude from the above information that one must never opt for an EMI without actually calculating the real-time benefits of the transaction. One must ensure if the benefits are superficial or real. Is it alright for the individual to block the credit limit for such a long period of time? Or would he rather keep it free for any of the future use? If one does not convert a large amount of money to EMI, can he/she arrange for any other cheaper funds source? All of these activities definitely affect the CIBIL score of the individual. Also, if the individual skips to repay any of the EMIs, it further decreases the CIBIL score. So one must be very cautious while opting for an EMI on a large transaction which is above Rs.5000. This is because opting for an EMI on a credit card does affect the CIBIL score of the individual to a great extent in the long run. Also, all the future borrowings are affected due to a single EMI that affects the CIBIL score.

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