Credit cards make our lives incredibly convenient. We all agree with that. Apart from making your day-to-day shopping and purchases easier, it also helps you tide over shorter periods of fund crunch. And how can we forget about the reward points and partnership deals that are available with using a credit card?

As the usage of credit card can benefit you immensely, credit card debt is the most expensive debt to have. If you are unable to pay your credit card outstanding in full each month, then you could end up paying interest to the tune of 24-48% p.a not only on the unpaid amount but also on amounts used in future and in addition also pay the late payment fee.

Most of the individuals using credit cards may be aware of the high interest rates, but we have had a lot of individuals write to us about the confusion between two different amounts payable that are shown on any credit card outstanding statement. In fact, we once received a query from a client asking us why he was being asked to pay more towards the credit card bill when the minimum amount due was much less.

CreditMantri, as your credit coach, will always be on your side helping you understand and deal effectively with all credit products.

What is Minimum Amount Due?

The Minimum Amount Due is, as the name suggests, the minimum amount of your credit card bill that you need to pay in order for the bank to keep your account regularly. By paying the minimum amount due, you will avoid late payment penalties and negative remarks on your credit report.

It is generally 3% to 5% of the total credit card bill which you will need to pay by the end of the billing cycle. This amount may vary from bank to bank and the minimum amount due can be more than 5%. At times, the percentages could vary depending upon the total amount outstanding against your credit card.

How Can Minimum Amount Due Help You?

Financial emergencies can come at any time in life. You may land up in a situation where you don’t have enough funds to pay off the entire credit card bill. It could be due to any reason for the loss of job, emergency medical issue, accident, etc. due to which your spending saw a spike and now you do not have enough funds.

At this juncture, your credit card outstanding bill gives you an option to pay Minimum Amount Due instead of paying the entire amount. Instead of paying the entire amount you can get some relief by paying the minimum amount due. 

Let us see it with an example

 Bill Date 

 Total Amount Due 

 Minimum Amount Due 

 Pay by Date

 05 May 2019 

 Rs 15743

 Rs 787.15

 20 May 2019

 

So in our example, by paying an amount of Rs 787.15, you can be saved from the penalty of late fee and moreover, your credit score also doesn't get adversely affected as you have made some payment towards your credit card, which may indeed be a matter of relief for the moment.

Also, when you make a minimum amount due payment, you can also pay up the entire amount due at any time. You need not wait for the next bill to arrive. If it is a temporary finance crunch that you are facing, you can make good the remaining payment as soon as you get funds.  Further, it is also possible that you make a payment which is higher than the minimum amount due but lower than the entire outstanding amount.

What is the Disadvantage of Paying Just The Minimum Amount Due?

You must have been relieved to learn that just by paying the minimum amount due, you have saved yourself from the late fee without an impact to your credit score. But is your responsibility over towards the sum that is still unpaid? Is it sufficient if you pay it with the next month's bill?

Unfortunately, you do not have that liberty.  You have time till the Pay By Date to make the full payment for your outstanding bill. When you make payment just for the minimum amount due, the other 95% of your outstanding bill continues to be outstanding and also gets charged interest. Not only the outstanding amount, any amount spent subsequently will also be charged interest.

Going with the figures from our earlier table with APR on the card as 36%.

 

Total Amount   Outstanding

Minimum  Amount Due

Amount Outstanding as On  Pay By Date 

Spend during the next  billing cycle

Total amount due as on the date of  Bill generation

Interest charged on the  amount

Total amount  due 

 15743

 787.15

 14955.85

 5000

 19955.85

 598.70

 20554.55

* Excluding GST figures

When Should You Pay Just The Minimum Amount Due?

It depends. If you are in a cash crunch, paying minimum amount due may be a good way to tide over the crisis for one or two months.  Paying the minimum amount due will be useful to give you a breathing space after which you can pay off the balance as soon as possible.

But, if you are going to continue going to use minimum amount due as your paying strategy for each month, it is a very risky decision. This is because each month the balance increases along with the interest and GST. The interest and GST get compounded on the balance of each statement, making the balance grow exponentially. If you miss your credit card payment for a month, late payment penalties are also added to this. Over a period, the credit card debt becomes unmanageable and you are in serious trouble.

Additional Reading: Learn how interest on your credit card works?

We do understand that it is not possible to pay the monthly balance every month and would be forced to pay what you have, sometimes a minimum balance. Although it might be your immediate solution, continuously just paying minimum balance will adversely affect your credit score.

It would also send signals to lenders like banks and NBFCs that question your creditworthiness and would affect your ability to get future loans.