"No-Cost" EMIs have become increasingly popular, promising a seemingly interest-free way to purchase expensive items. However, it's crucial to understand the real costs associated with these offers and how they can impact your credit score. While they appear attractive, a lack of awareness can lead to financial strain and a damaged credit history.

The Illusion of "No Cost"

The primary appeal of a No-Cost EMI is the promise of paying only the original price of the product, spread out over monthly installments, without any interest. However, the Reserve Bank of India (RBI) has cautioned against the very concept of "zero percent interest," stating that interest components are often hidden or camouflaged. In reality, the "interest" cost is usually factored in through one or more of the following ways:

• Discount Adjustment: Retailers might offer a discount equivalent to the interest amount but remove the discount if you opt for the EMI option. The product's price under the No-Cost EMI scheme might be higher than its regular price if you were to pay upfront.
• Processing Fees: Lenders may waive the interest but charge a processing fee, which can range from 1% to 3% of the amount, increasing the overall cost. GST is applicable on these processing fees, further increasing the cost.
• Hidden GST: While e-commerce platforms might absorb the interest cost, the Goods and Services Tax (GST) is levied on this "interest" amount, effectively making you pay a portion of it.
• Loss of Cashback/Rewards: Opting for a No-Cost EMI might disqualify you from cashback offers, reward points, or milestone benefits that you would have otherwise earned on a full upfront payment using your credit card.

Impact on Your Credit Score

While using a No-Cost EMI might seem harmless, it can indirectly affect your credit score in several ways:

• Missed or Delayed Payments: This is the most significant risk. Since No-Cost EMIs are a form of credit, missed or delayed payments are reported to credit bureaus and can drastically lower your credit score. A delay of even 30 days can cause a substantial drop. The RBI has mandated that lenders update credit bureau records every 15 days, making timely repayments even more critical.
• Credit Utilization Ratio: When you make a purchase on EMI, the entire purchase amount is immediately blocked from your credit card's credit limit. This can significantly impact your credit utilization ratio (the amount of credit you're using compared to your total available credit). A high credit utilization ratio can negatively affect your credit score.
• Overspending: The ease of paying in installments can lead to impulsive purchases and overspending, potentially leading to difficulty in managing repayments and, consequently, a negative impact on your credit score.

Staying Safe with No-Cost EMIs

To make informed decisions and protect your credit score when considering No-Cost EMIs, keep the following points in mind:

• Read the Fine Print: Carefully scrutinize the terms and conditions to uncover any hidden charges, such as processing fees, down payment requirements, or prepayment penalties.
• Compare Prices: Check if the product's price under the No-Cost EMI scheme is higher than its regular price. Factor in any potential loss of discounts or cashback offers.
• Assess Affordability: Ensure you can comfortably afford the monthly installments without straining your budget. Consider your existing EMIs and other financial obligations. If you don't have enough money to pay for the EMI for at least the next three months, don't even think of opting for it.
• Timely Payments: Prioritize timely repayment of your EMIs. Automate payments or set reminders to avoid missing due dates.
• Monitor Credit Utilization: Keep track of your credit utilization ratio and ensure it remains within a healthy range (ideally below 30%).
• Enquire about hidden charges: Check with your credit card issuer or bank for any such hidden charges.
• Budget Assessment: Approach it with a financial assessment.

No-Cost EMIs can be a useful tool for managing your finances and making larger purchases more affordable. However, it's essential to be aware of the potential hidden costs and the impact on your credit score. By carefully evaluating the terms and conditions, assessing your affordability, and prioritizing timely payments, you can leverage the benefits of No-Cost EMIs without jeopardizing your financial health.