5 Reasons To Avoid Paying The Minimum Amount Due On Your Credit Card
Description: Recently, it has been observed that several Indians are falling into a dangerous habit of paying only their minimum amount due on their monthly credit card bills. This practice, however convenient, is financially unhealthy.
Keywords: minimum amount due in credit card, credit card billing cycle
Over the last few years, a large part of our lives has moved online. This includes our money and the way we view financial transactions as well. Today, a significant number of Indians own and use credit cards as their primary financial tool.
According to the Reserve Bank of India (RBI), the number of total outstanding credit cards in December 2019 was about 55.33 million. That single month saw transactions worth Rs. 6660.904 billion conducted through credit cards.
This staggering figure gives us a good idea of the percentage of Indians who use this plastic card to carry out transactions. But with over-usage comes the risk of overspending and misunderstanding. Several Indians today are falling into the dangerous habit of paying only the minimum amount due in credit card at the end of each month.
It is useful to understand what the minimum amount due is, and the pitfalls that come with only paying the minimum amount due every month.
What is the minimum amount due?
At the end of every month, your credit card charges you a certain amount for the transactions undertaken during that month. You can choose to pay the full outstanding amount, or alternatively, only pay the minimum amount due. This minimum amount is a small fraction, usually 5% of your total credit card bill amount for that month.
Paying the minimum amount due in credit card helps in avoiding late payment charges, and also secures your credit account. It can also reduce the outstanding balance of the current month, but it does not waive off the interest on the outstanding amount. The minimum amount only acts as a safety valve that protects your creditworthiness, in case you are unable to pay the full amount in a month for any particular reason. While this is a convenient option, it’s not a financially healthy one. Here are five reasons why.
; Debt trap
When you continue to pay only the minimum amount for several months at a stretch, your total bill rises at an exponential rate. Even after the minimum payment is made, the remaining amount continues to attract an expensive interest rate. For instance, let’s say you’ve made a credit card purchase for Rs. 50,000. Your credit card billing cycle puts down your minimum dues as Rs. 2,500, i.e., 5% of your total bill amount. Let’s say you pay off this minimum amount and you’re left with Rs. 47,500. Now, the credit card continues to charge a monthly interest of 3-4% on this remaining amount. When this accumulates over a long period of time, you end up paying way more on your credit bills.
2. Credit score
A credit score is a numerical indicator of the user’s creditworthiness, i.e., their ability to repay debt. This is an important metric used by lenders before lending loans, making it crucial for everyone to have a stable credit score. At the end of the month, when you pay more than just the minimum amount due in credit card, it helps to stabilize your credit utilization ratio. The credit utilization ratio is the amount of balance on a credit card when compared to the credit limit. When you consistently only pay the minimum amount, it damages your credit score that could hamper future loan possibilities. Therefore, it is recommended that you pay the total outstanding amount every month, or at least whenever possible.
3. Interest will pile up
As illustrated above, the remaining amount on your card bill (after the monthly credit card billing cycle) will continue to get charged at a rate of interest. The interest rate varies for different credit cards, but generally, they range between 3% and 4% per month. This amounts to an annual interest rate of over 40% which translates to a significant amount that you will have to pay over time. This can be avoided with regular payments that keep the interest rate in check.
4. You pay off your credit card balances faster
This is a natural consequence of regular payments of credit bills. Due to the modern consumer’s increased preference for plastic money, credit and debit cards are being used extensively today. So, it is unsurprising that users’ monthly credit bills are skyrocketing. Putting off the bill payment for later by paying only the minimum amount due now doesn’t help in clearing your credit card balance. On the contrary, regular payments on your credit card billing cycle can ensure that you are not faced with a sudden mountain of money required to be paid.
5. Save money
Every financial transaction boils down to saving as much of our hard-earned money as we can. Following a healthy, regular payment practice can help in avoiding extra payments over time, and stop it from affecting our loan prospects. Financial stability is required for the volatile future, and it can be achieved through small ye
t significant moves like paying more than your minimum amount due on your bills.
Our dependence on credit cards and other forms of digital money is only going to increase in the coming years. While a credit card is highly convenient for spending, it is not without the risk of overspending and falling into a debt trap. This makes it important for all of us to understand the terms and conditions of our credit card, and the prescribed modes of payment. Accordingly, we should make an informed financial decision and secure our financial future. Paying only the minimum amount due results in incurring significant interest rates on the balance payments, which could put a significant dent in our savings in the long run.