If you are a regular credit card user, you may be given the option to pay the minimum amount due in credit cards by the bank. It’s a huge relief for the credit cardholders who cannot pay a lump sum amount in one go. Through this option, the cardholder can choose to pay the minimum amount from the total bill they are liable to pay that month. In situations where the user pays only the minimum amount, interest will only be charged on the remaining balance.
This article helps you understand what is the minimum due amount, how to calculate it, the benefits of paying the minimum due amount and more. Read on!
The minimum amount due on your credit card statement is the minimum amount you must pay by the due date to keep your card active and continue to enjoy the various credit card features and benefits offered by your card. Generally, your credit card’s outstanding balance must be paid in full each month before the due date. Failure to settle unpaid credit cards by the due date may result in severe penalties and invalidation of the card. But what if you can’t pay the full amount you haven’t paid due to lack of funds? This is where the concept of credit card minimums comes in handy. Banks usually offer the option to pay a portion of the total unpaid amount by the due date. This is called the minimum payment amount. Not only does this help keep the card active, but it also prevents penalties from being imposed.
It’s always best to pay more than the minimum required, but you need to understand how to calculate the minimum and what if you don’t. Credit card issuing RBI recognised banks have different methods to calculate the minimum amount due, but some generic methods are available.
Some issuers calculate the minimum payment as a percentage of the balance at the end of the billing cycle in addition to the finance charges. For example, 1% of the balance and accrued interest. Suppose you have a balance of Rs. 1,000 and an annual rate (APR) of 24%. The minimum payment is 1%- Rs.10, plus the monthly loan fee- Rs.20. This totals a minimum payment of Rs.30.
Some credit card providers calculate a minimum payment as a direct percentage of their balance at the billing cycle’s end. This percentage is higher than in the scenario above, probably between 2% and 5%, and counts in both principal and interest costs. Calculated at 2% of that balance, it’s Rs.20.
If you pay only the minimum amount, you have the following benefits:
If the benefits are so great, why do most financial professionals insist on paying the total unpaid amount instead of the minimum payment? Let us go through the next section to understand the disadvantages of paying the minimum dues.
If you think paying the minimum due on a credit card will help you pay off your credit card debt, you are heading in the wrong direction. In reality, you can reduce your unpaid payments with a payment minimum. But if you keep paying a minimum, your debt is far from being paid off. If you decide not to make any further purchases until you have repaid the unpaid amount and only paid the minimum payment, your debt will not be reduced. Instead, it increases.
Your unpaid balance earns interest every day. If not well managed, you can quickly and unknowingly fall into a debt trap. If you do not pay the full amount of the unpaid amount repeatedly, the balance and the new purchase will be added up, and the interest will be calculated based on the new unpaid amount. In other words, if you keep paying only the minimum amount that should be paid, you lose the privilege of the interest-free period.
If you do not pay the minimum payment on the credit card amount by the due date, you will incur charges on the unpaid invoice. These charges typically range from 30% to 49% per year on unpaid amounts. Unpaid due can also lead to the cancellation of interest-free periods for new credit card transactions. Failure to repay the minimum amount will also adversely affect the cardholder’s creditworthiness.
If you cannot fully repay your credit card invoice by the due date, you can convert all or part of your credit card invoice to an EMI. This helps reduce the interest burden, as the interest rate for such EMI conversions is much lower than the actual cost. The duration of such EMI conversions can range from 3 months to 5 years, depending on the card issuer, allowing cardholders to choose EMI conditions based on the affordability of EMI. EMI conversion reduces interest costs for cardholders, saves funding costs for new card transactions, and allows unpaid due to be repaid in smaller amounts based on repayment capacity.
Paying the minimum amount due in credit cards on time can prevent your credit score from plumetting. However, that also means that you end up paying interest amount to the banks. Choose the right card for your needs. Then make all payments on time and keep your balance as low as possible. Learn how credit card usage affects your credit score and work on building a positive credit history. Make sure you take advantage of all the benefits that come with your credit card.
Ans: A secure credit card works like a regular credit card. The only difference between a standard credit card and a secure credit card is that the latter is issued against collateral such as deposits to reduce the risk level of the card issuer. A secure credit card is helpful for people who have no or inadequate credit history.
Ans: You can find out if you are eligible for a credit card by checking the eligibility criteria posted on the bank’s website. You can also contact the customer service department of your credit card issuer to verify your eligibility.
Ans: The credit limit is the maximum amount of credit that a credit card can accept. The applicant’s credit limit depends on its profile, repayment capacity, and CIBIL credit report. However, you can request this from your provider to raise your credit limit.
Ans: Yes, you can withdraw cash from ATMs with your credit card. However, withdrawing cash with a credit card will incur additional charges ranging from 2.5% to 3.5%.
Ans: The total unpaid amount is the same as the total spending of the card in a particular billing cycle, but the minimum unpaid amount is only a small part of the total amount used. You do not have to pay any additional charges if you pay the full amount with a card. On the other hand, if you pay the minimum payment or more than the minimum payment and less than the total payment, it indicates that your balance will be charged interest.
Before you go…
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.