Nowadays, the option of ‘Debit Card EMI’ has become quite popular on online shopping websites like Amazon, Flipkart or offline electronics retail stores. Consumers who do not have a credit card make extensive use of the EMI facility available on their bank’s debit cards to buy expensive smartphones, laptops, smart TVs or home appliances.
Most consumers think that since it is their debit card i.e. the card linked to their savings account, it will have nothing to do with their credit history or CIBIL score. But according to financial rules this assumption is completely wrong. Whenever you buy a product on EMI on debit card, behind the scenes the bank gives you a Unsecured Consumer Loan / Personal Loan Issuances. This has a direct and deep impact on your CIBIL score.
How do banks process debit card EMI?
Debit card EMI is not deducted from the money already deposited in your bank account, rather it is a limit given by the bank on the basis of your past banking transactions, salary flow and account history. Pre-Approved Loan Limit it occurs.
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When you choose Debit Card EMI at checkout, the bank immediately reimburses the entire product price to the merchant.
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After this the bank opens a new ‘Consumer Loan Account’ in your name.
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These loans are formally reported to all four credit information bureaus—TransUnion CIBIL, Experian, CRIF High Mark, and Equifax.
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As a result, it appears as an active loan on your credit report.
How can debit card EMI increase CIBIL score? (advantages)
If you are financially disciplined, debit card EMI can be a great way to raise your CIBIL score to 750 or 800+:
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Building Credit History for NTC: If you have never taken a credit card nor taken any loan in your life, then you fall in the category of ‘New to Credit’ (NTC). By making small purchases on debit card EMI, you can build a strong credit score even without a credit card.
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Timely Repayment History: Your repayment record has 35 percent weightage in calculating the CIBIL score. If your EMI is successfully auto-debited on the due date every month, your score improves exponentially by 5 to 15 points every month.
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Improvement in Credit Mix (Credit Mix Balance): A balance of both secured (home/car loan) and unsecured (personal loan/credit card) is considered good for a healthy credit profile. This EMI diversifies your portfolio.
When and how can your CIBIL score deteriorate? (pitfalls and mistakes)
Even a little carelessness in debit card EMI can bring down your CIBIL score by 50 to 100 points:
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No balance in account and EMI bounce: If there is not sufficient amount in your bank account on the EMI deduction date (Auto-Debit Date), the EMI will bounce. The bank will immediately send ‘DPI’ (Days Past Due – DPD) and ‘Default’ reports to the credit bureaus. A single default remains recorded in your CIBIL records for at least 24 to 36 months.
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Extra bounce and penalty charges: In case of bounced EMI, banks charge you ECS/NACH bounce charge and late payment penalty ranging from ₹400 to ₹600, which adds unnecessary financial burden.
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Checking EMI Eligibility Frequently: If you repeatedly check on various shopping apps whether your debit card is eligible for EMI or not, some banks register a ‘Hard Inquiry’ for the same. Seeing a lot of hard inquiries in a short period of time can reduce the CIBIL score.
Important precautions for secure debit card EMI
If you are planning to purchase through Debit Card EMI, keep these important points in mind:
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Maintain sufficient balance in the bank account to which the debit card is linked at least 24 to 48 hours before the scheduled date of EMI deduction.
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Never pay EMI more than 30 to 40 percent of your total monthly income.
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Download your free credit report every three to six months to check whether all EMIs paid are correctly recorded as ‘Closed’ or ‘On-Time Paid’.
Debit card EMI facility is a great option to purchase without a credit card in times of financial crunch, but it is very important to remember that this is not your savings but a loan from the bank. Making payments on time will strengthen your CIBIL score, whereas carelessness can ruin your chances of getting a home loan or personal loan in the future.