When you receive a credit card bill, you have the option to pay two amounts. One is the total outstanding amount and the other is the minimum due. If you are short of cash there is a tendency to pay the minimum amount due. But this has a limited benefit. If you are in the habit of doing this regularly, your credit card bill could see a spiralling. Read on to know more.
What is the minimum due in Credit Cards?
“The minimum amount due on a credit card is the minimum amount you are required to pay, on or before the payment due date, to ensure that you do not have to pay late fees.” By calculating a minimum amount, the bank ensures you can repay a portion of the principal outstanding every month.
- The minimum amount due is 5% of the total outstanding amount.
- If you have converted any payment on your card to EMI, that amount is also added to the minimum amount.
- Any unpaid balance from the previous billing cycle is also added to the minimum amount
The benefit of paying the minimum amount
- By paying the minimum amount, you can keep your credit active, i.e. you can continue to use the card for the total available credit limit (barring the amount converted to EMI)
- Besides, the bank will not classify your payment as a ‘default’ in the credit record if you pay the minimum amount due. This will ensure that your credit score is protected.
- You can avoid late payment fee
How is the minimum amount calculated?
The minimum amount due is calculated as 5% of your balance outstanding or the sum of all instalments, interest/other bank charges, the amount used over the credit limit and 1% of the remaining balance outstanding, whichever is higher. It will also add any unpaid minimum amount due from previous statements to your current minimum amount and arrive at the total minimum amount due.
What happens if you only pay the minimum amount due?
Paying the minimum amount due on a credit card sounds comfortable. Despite having a huge credit card bill, the minimum amount gives you the impression that your debt is sustainable. However, you must realise that paying only the minimum amount every month results in your debt stretching over years, with eventual interest payment on your outstanding balance.
Risk of paying the minimum amount
- When you pay the minimum amount the rest of the balance gets carried forward and interest is charged on that amount
- The minimum amount increases for every month that you delay full payment, as the balance amount of one month is added to the minimum amount of the next month
- Credit card interest rate ranges from 35-40% on an annual basis. It is calculated daily on the outstanding amount, i.e. the unpaid amount.
- The interest is charged from the date of the purchase, and not the end of the billing cycle. Hence, every time you pay only the minimum balance you incur interest charge on that amount from day one and effectively lose out on the benefit of the credit-free period.
- Your available credit limit is reduced to the extent of amount not repaid. Hence, you may not be able to swipe your credit card as per your needs.
All of us run short of our funds sometimes. If you’re stuck in such a scenario, you should at least pay the minimum amount due on a credit card to lower your debt. However, never make it a norm to make payments only for the minimum amount due, since it will only increase your debt.
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