Can no-cost EMI help build credit history and enhance your credit score? Find out here | Mint

In today’s consumer-driven world, buying electronic gadgets and more has become much easier with attractive EMI (Equated Monthly Instalment) options. EMI options have given consumers the flexibility to make high-value purchases without immediate full payment, enabling better financial management. Among the various EMI options available, no-cost EMI stands out as an attractive choice for many.

What is no-cost EMI?

No-cost EMI (Equated Monthly Instalments) is a payment option where the buyer can purchase a product or service and pay for it in equal monthly installments without incurring any interest charges. But can it help you build your credit history and enhance your credit score?

How does the no-cost EMI plan work?

No-cost EMI, also referred to as zero-cost or interest-free EMI, is a payment option that allows you to convert the cost of your desired item into instalments, with no additional charges over the agreed purchase price. This option excludes additional monthly EMI charges and can be availed both online and at physical stores. Individuals with a strong credit score can easily avail this payment option.

Traditionally, EMIs include an interest component. However, in a no-cost EMI plan, this interest is waived. The discount provided by the merchant is equivalent to the interest you would have paid on the borrowed amount. In case you have any queries regarding the eligibility criteria, you can connect with your bank, which is also your card issuer.

What are the pros and cons of a no-cost EMI plan? 

Like all financial options, the no-cost EMI scheme comes with its benefits and limitations. Some of the key points to consider include:

Pros:

• Interest-free payments: With no interest on the instalment amount, your purchase becomes more economical. You pay exactly what the product is worth, with no extra charges.
• Budget management: By dividing the product cost into equal monthly instalments, this option allows you to manage your budget and maintain better cash flow.
• Improvement in credit scores: Regular and timely payments under a no-cost EMI plan can positively impact your credit score by reflecting good credit management. This can enhance your eligibility to secure better credit products in the future.

Cons:

• Limited product options: Not all products or brands offer this payment option, which can limit your choices when shopping for your favorite laptop or television set.
• Specific terms and conditions: There are often specific terms and conditions attached to a no-cost EMI scheme, such as minimum purchase requirements or validity on certain products. These can impact the overall benefits. For instance, while interest might be waived, processing fees, down payment requirements, and other administrative charges may apply in certain schemes. Therefore, you must carefully read the terms and conditions to understand if there are any other potential additional costs involved.
• Credit limit use: Availing of no-cost EMI utilises a portion of your available credit limit. This could impact your credit utilisation ratio and might affect your ability to take on additional credit until the amount due is fully settled.

How does no-cost EMI help you build credit history?

The growing popularity of the no-cost EMI option is enabling people to build their credit history. This is particularly true in the case of small-ticket purchases.

Credit history is a detailed record of your borrowing and repayment activities, including information about your credit cards, loans, mortgages, and other financial commitments. Banks and NBFCs strongly rely on your credit history to assess your creditworthiness and decide if you are eligible for credit cards, loans, or any other form of credit.

In recent years, digital lending has enabled all eligible consumer segments to access credit through no-cost EMIs at the point of sale and payments are processed via card swipes to the merchants. Almost all small and large lenders today offer this type of credit. Taking a loan, even a small one, can make it easier to secure credit in the future as it helps in building a credit score.

As people increasingly opt to buy products through the no-cost EMI option, they not only engage with the formal financial sector but also begin building their credit history. It is noteworthy that every step of this journey becomes part of their personal credit history, which, in turn, opens new opportunities for the future. This means that every timely payment during the course of the EMI tenure can contribute to a good credit score.

Conclusion

No-cost EMI can be a valuable tool in building your credit history and enhancing your credit score, provided you use it responsibly. Be careful about the down payment and processing fees, if any. Read the fine print and terms and conditions carefully. 

Also, note that if you do not have a credit card from the relevant bank that offers the scheme, you can’t get the no-cost EMI deal if it is attached to the credit card. By managing your finances wisely, you can leverage no-cost EMI to improve your creditworthiness and achieve your financial goals.

Sachin Seth, Chairman CRIF High Mark and Regional MD CRIF India & South Asia