Running Low on Cash? Convert Rent Into EMI Using Credit Card
It's a predicament many young professionals find themselves in - you've moved to a new city, ready to start an exciting job and independent life. But between settling in costs, rent deposits and just getting back on your feet, your bank account has taken a hit. Paying this month's hefty rent bill in one go could clean you out completely. What do you do?
One short-term solution is turning that lump sum rent payment into a monthly instalment (EMI) by charging it to your credit card. While credit cards should be used responsibly, their EMI conversion feature can temporarily ease cash flow woes when money is tight. Here's how it works and tips for doing it strategically:
How Credit Card EMI Conversion Works
Most credit cards allow you to convert a large purchase into 3-24 smaller equal monthly payments at an additional cost. It's best for big recurring expenses you can plan for, like rent, tuition or insurance premiums. The bank charges simple interest on the EMI - usually 1-3% per month on the amount converted. You'll pay more overall than the original purchase amount, but it spreads the impact over time.
For example, if your rent is ₹30,000, you could convert it to a 6-month EMI of ₹5,300 instead of paying the full ₹30,000 upfront. Your total outflow would be ₹31,800 including interest. Still expensive, but more manageable month-to-month than paying rent in one shot.
Tips for Converting Rent to EMI Strategically
While credit card EMIs aren't the cheapest financing option, used judiciously they can help you smooth out expenses. Follow these tips:
Compare cards - Different credit cards charge different EMI interest rates and fees. Go for the lowest.
Pick EMI tenure wisely - longer tenure means smaller instalments, but higher overall interest. 12-month EMI is a good middle ground for rent.
Automate payments - Set up auto pay of EMI from your account to avoid missed payment fees.
Pay EMI on time - Late payments negate the purpose of reducing monthly burden.
Make other cuts - Reduce other discretionary spending to pay off EMI each month and avoid rolling over credit card debt.
Have a repayment plan - Treat the EMI as debt you plan to repay in full after your situation improves. Don't incur new debt during the EMI period.
Build emergency fund - Once financially stable, start setting aside cash reserves to avoid future need for EMI.
Watch Out for Downsides
At first glance, credit card EMI seems like an easy, interest-free loan to cover big expenses. But this convenience comes at a steep price if used irresponsibly or long-term. Be cautious of the major pitfalls of relying on credit card EMI conversion:
First and foremost are the exorbitant interest rates charged, typically 1-3% per month. This adds up to 12-36% annually - much higher than interest on personal loans or secured lending. Only use EMI if you have no other recourse to pay a large necessary expense.
Second, high credit card balances have an adverse impact on your credit score and future loan eligibility. Financial institutions see it as taking on risky debt. This can hamper plans to make major purchases requiring loans down the road.
Next, your credit limit gets encumbered by the EMI amount, reducing purchasing power for other expenses you may have to unexpectedly incur. This can lead to utilization crossing 100% and invites penalties.
Even a single missed EMI repayment can attract heavy late payment fees and interest retroactively charged to the outstanding EMI amount. This negates the entire purpose of the EMI facility.
Finally, over-dependence on credit card EMI without budgeting masks underlying cash flow issues. It is very easy to fall into a debt trap this way as existing EMI gets rolled over into new debt.
So, while credit card EMI may offer temporary liquidity relief, be very cautious in its usage to avoid entering a vicious cycle of costly debt. Have a strong repayment plan and timeline before taking the EMI plunge.
Use EMI as Temporary Bridge
Converting rent to EMI can be a useful short-term cash flow strategy, but not sustainable long-term. Have a plan to repay the EMI and associated interest costs within 6-12 months at most. Get finances back on solid ground so you aren't dependent on credit card float to cover basics like rent.
With some discipline and restraint, credit card EMI conversion can be a temporary bridge to ease liquidity pressures when money is tight. But approach it with eyes open to the costs and risks. Make rent EMI a stepping stone towards building savings and financial stability, not a crutch. Take control of your finances again so that next time cash runs low, you have reserves to dip into rather than debt to take on.