Credit Card Loans & Easy Installments – Explained

Credit cards make your life easier.

If you pay your dues in time, credit cards are like a short-term loan with no interest. They are accepted at millions of merchants worldwide and are a great way to track your spends. And of course, there are perks and rewards on your spending.

You should definitely read my earlier post on how I saved AED 15,000 ($4,000) through my credit card strategy.

However, life is rarely all good ain’t it? Credit cards can also be a headache.

There is the good headache. This is when you need to decide which credit card to use for a particular spend. Every time I do this, I feel like the manager / coach of a sports team (my cards are my players).

Then, there is the bad headache. The time when you have overspent or cannot pay your credit card bills on time. Or perhaps, you need some cash. Do not worry, it happens to all of us. There are two relatively cost-effective methods to manage your finances – Credit Card Loans & Easy Installments. I will cover both here.

Note: This post is for a new / inexperienced credit card user.

Credit Card Loans

Banks / credit card companies are happy to extend you a loan as transfer to your bank account. This is similar to a personal loan and is usually a percentage of your unutilized credit limit.

In Middle East, the duration of the loan is usually between 3 to 24 months. You are charged a loan processing fee and a monthly finance charge. The loan amount is paid either every month for duration of loan or at the end as a bullet payment.

If you are eligible for such a loan, it is likely someone has already offered you. Alternatively, you can see an option if you login to your account. There is no do-not-disturb option in UAE and it means I get at least 3 calls a week from banks offering me a loan on credit card or an EMI scheme. Fortunately, the agents are not pushy and the call lasts less than 10 seconds.

Some of the options available to me in the UAE are

1. Loan for duration of 6 months with 3% processing fees, no other finance charges / interest
2. Loan for duration of 6 months with 1% processing fees, 0.39% monthly finance charges / interest

An important point, credit card loan is different from a cash advance on your credit card. A cash advance is an instant transaction e.g. going to the ATM and withdrawing cash on your credit card. In a cash advance, you pay a fees (e.g. 3% of AED 99 whichever is higher) and finance charges (could be as high as 3-4% every month!).

Except for failing to pay your minimum amount due, a cash advance is the worst possible way to use a credit card. I will never recommend it except for some dire situations (e.g. losing all your cash and debit cards in a foreign country).

Easy Installments

This option typically works on relatively high-value transactions. For example, let us assume your total credit card outstanding is 5,000. It includes a large purchase of 4,000 and several smaller purchases of 1,000. Your credit card provider gives you an option to spread the large purchase over several months (typically 3-24 months). Therefore, to cover your outstanding in full, you will need to pay only 1,000 this month.

The mathematics work the same way as taking a credit card loan of 4,000. You are charged a combination of loan processing fee and a monthly finance charge.

Please note, if you convert your purchases to installments, it usually does not count towards your minimum spend to earn credit card rewards. You may or may not be able to earn points on the converted spend.

Calculations

I have seen savvy users and even experienced finance professionals getting confused with the calculations. And the reason is that the results are not always what they seem. To evaluate and compare the offers, you need to understand what the actual cost of borrowing will be.

I have put up a google spreadsheet here (link) that enables you to do this.

If you are interested in evaluating an offer, you can insert the amount, duration, processing fee and finance charges in the sheet. It will provide you with the implied annual finance charge – so that you can do a like-to-like comparison.

Let us compare two options available to me as mentioned earlier. The first one implies an annual interest of 6.26% and second one is 6.91%. So all other things alike, I will prefer the first option.

Let me know if it helps.