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Understand the Concept of Minimum Amount Due and Why It’s Not Advisable to Follow It

June 22, 2018 12:01 pm by: Category: Finance Comments Off on Understand the Concept of Minimum Amount Due and Why It’s Not Advisable to Follow It A+ / A-

Credit Cards, being one of the most popular financial products of all times, are widely used by a large number of individuals. They are offered by most banks and NBFCs (Non-Banking Financial Companies) in India. If you are interested in getting one, you can easily Compare and Apply for Credit Cards online as well as offline.

Benefits of Credit Cards

Most of us have one or more Credit Cards in our wallets, which we are more than happy to use for making payments against online and offline purchases. In fact, they are one of the most secure modes of making payments, as in case you lose your Credit Card and make a complaint with your card issuer, you are reimbursed against any unauthorised usage.

Nowadays, with the rising popularity of e-commerce, Credit Cards are being extensively used by the customers for making payments online. The Credit Card offers, cashbacks, discounts and rewards, encourage customers to use them frequently. Additionally, most cards come with an interest-free period ranging from 15-60 days, during which you need not pay any interest against the amount utilised if you repay the whole amount by that time.

Issues with Credit Cards

But everything is not as rosy as it may seem. Credit Cards carry a very high rate of interest which can go up to 48% p.a. Additionally, if you are unable to repay the entire amount due within the interest-free period, your interest burden will increase substantially. Higher Credit Card usage ratio (more than 30% of total limit) also has a negative impact on your credit score and impacts your ability to get a loan in future. It requires strict financial discipline to manage your credit cards efficiently.

What is Minimum Amount Due?

If you carefully study your Credit Card bill, it has two options for making payment, either you pay the entire amount due,or you pay the minimum amount due. The minimum amount due is the amount that you must pay before the due date to avoid any late payment charges. In most cases, it varies between 5%-10% of the total amount due.

It helps you keep your account regular and ensures that you get away by paying only the interest due. It also ensures that the bank does not report your account to the credit bureau as irregular, which impacts your credit score and credit history both.

Why Should You Avoid It?

Although it may seem convenient for you to repay only the minimum amount due, it is one situation that you should definitely avoid, unless and until your financial situation does not permit you to repay the entire amount due. Below mentioned are some reasons that would help you understand the negative impacts of paying the only minimum amount due:

  • No interest-free period

If you continue paying only the minimum amount due, you will be foregoing the benefit of the interest-free period that comes with your card. You will be liable to pay the interest from the date of purchase itself,and you will be paying interest on this amount until you settle the dues of that particular purchase.

  • Payment towards interest only

The minimum amount due mainly covers only the payment towards the interest component against your purchases in a month. The principal would remain to standand then again you will be repaying interest on the principal the next month and so on. This would put you at a significant disadvantage,and you might end up paying more interest that the amount you actually borrowed.

  • Higher credit utilisation ratio

When you make a payment towards only the minimum amount due, the credit utilisation ratio against your Credit Card remains high. This has a negative impact on your credit score and also impacts your future eligibility for a loan. As you are only making payment against the interest due, the principal amount would continue to affect your credit utilisation ratio.

  • Longer repayment period

If you continue to pay only the minimum amount due, in order to clear your Credit Card debt, you will be making the payment for at least 36 months. This is also if you do not make any new purchase and continue to make the payment regularly.

  • Impact on credit score

The higher credit utilisation ratio would severely impact your credit score,and the lenders will consider you as a financially irresponsible persona,and it may jeopardise your plans to take any loans in future.

What Should You Do?

You must try to repay the entire amount due for every month to maintain a good credit score. But if your financial situation does not allow you this choice, at least try to pay as much amount as possible every month. This would help you clear your Credit Card debt quickly in comparison to making monthly payments. If you have spare money any month, use it to clear your card dues because your savings account will give you an interest of maximum 6% but your card debt carries an interest of almost 42%.

The minimum amount due is nothing but a trap that would place you under a mountain of Credit Card debt. You must organise your finances and try to repay the amount as soon as possible.

Also Read: Pros & Cons of a High Credit Card Limit

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About Jeffery A. Brown

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