When faced with a sudden financial emergency, a Personal Loan is not your only option. You can use your Credit Card for a loan too. A pre-approved loan on your card may be available for funds both within and over your card’s spending limit. Being a relatively lesser used option than personal loans, there are many myths associated with Credit Card loans. Here are some common myths about Credit Card loans busted.
Myth 1: Cash withdrawal against card is a loan
Many first time card users assume cash withdrawal facility available with their card to be the same as Credit Card loan. Cash withdrawal against Credit Card and Credit Card loans are treated in two distinct ways. The key difference between cash withdrawals on Credit Card and Credit Card loan is the rate of interest charged. On card loans, it is comparable to Personal Loan rates.
The interest rate for cash withdrawals from Credit Card is significantly higher. Also, the interest rate is calculated from the day of the cash withdrawal as opposed to the typical interest-free period that is provided to other Credit Card transactions. The amount of cash that can be withdrawn is limited for each credit card as per the overall credit limit. All Credit Card cash withdrawal comes with a withdrawal fee, which increases the charges of the transaction further.
Myth 2: Late payment does not attract interest
When you opt for a loan against Credit Card, repayments are to be made in periodic monthly installments. The EMIs will be billed to the Credit Card every month depending on the loan tenure. If you fail to repay your Credit Card loan EMI, you are charged a high interest component. This interest component is in addition to the interest you’re paying towards the loan.
Myth 3: Credit Card loans are at reducing rates
The rate of interest offered on a Credit Card loan is often the deciding factor for many users when it comes to finalising a loan. Compared to a Personal Loan, Credit Card loans may appear to come at a slightly lower rate of interest but there is a catch. Credit Card loans are offered at flat interest rates unlike personal loans which come at reducing balance rates.
A flat interest rate is calculated on the full loan amount throughout the loan tenure without considering paid EMIs are reducing the principal amount. For example if you take a loan of Rs. 1 lakh with a flat rate of interest of 10% PA for three years, you would pay a total interest of Rs. 30,000 with an effective EMI of Rs. 3611. With the same EMI amount, the effective rate of interest using a reducing balance option comes to 17.92%.
Myth 4: Balance transfer is not a loan
You can transfer the outstanding balance on your Credit Card from one bank to the other. Opting for a balance transfer option means you are seeking a fresh loan for repayment of old dues. The loan amount is usually disbursed through DD, Credit Card number, or loan account number of the old bank. Being a new loan, CIBIL verification is done post application of balance transfer option. Since balance transfer option is a new loan application, processing fee charges are also applicable.
Myth 5: Taking card loans will not hurt your Credit Score
Banks offer loan on Credit Card facility only to card holders having a good repayment history and a high Credit Score. So if you have a Credit Card but your Credit Score has declined substantially, your chances of getting a loan against Credit Card reduce. Loans against Credit Card are just another unsecured loan option similar to Personal Loans. Any repayment defaults also hurt your Credit Score in the long run.
Credit Card loans can be a good options to raise finances when faced with a financial emergency provided you understand the loan and its intricacies.
(The writer is CEO, BankBazaar.com)