Credit card usage has steadily increased over the years. Today, most banks offer credit cards to the majority of account holders at nominal charges. Irrespective of whether you’re using credit cards for the first time or a veteran user of the plastic card, it’s essential to understand the importance of minimum payment due.
Here, in this guide, you can find all that you need to know about the minimum amount due on credit cards and whether it makes sense to pay just the minimum amount due.
What is the minimum amount due on credit cards?
As the term implies, it is the minimum amount you are required to pay for your credit card bill, on or before the due date. A credit card helps you purchase today and pay for it later. Every purchase you make using your credit card is added to your bill, which is generated at the end of the payment cycle.
Very often, credit card holders find it difficult to pay the entire bill amount. Hence, credit card companies offer cardholders the facility to pay just a portion of the bill initially. This small amount is known as the minimum amount due on the card.
The minimum amount due is a percentage of the total outstanding in a month. Generally, the minimum amount due is calculated at 5% of the unpaid balance. Note that the minimum amount due is not a fixed amount. It varies every month, depending on the purchases you have made using the card.
Other factors that determine the minimum amount due are available credit limit, EMI purchases made on the card, previous month's dues and more. Any unpaid minimum amounts from the past months are added to the current minimum amount.
Additional Reading: Learn how interest on your credit card works?
Key Points to Know Regarding the Minimum Amount Due
Minimum amount due is the lowest amount you can pay on your credit card bill, to avoid late fees and other penalties.
It is calculated as a percentage of outstanding bill payments along with any other fees charged to the balance.
Higher the credit card bill, the higher is the minimum payment due.
Generally, the minimum payment due is printed on the credit card statement generated every month.
If it’s not available, you can log into your credit card account to check the minimum balance online. Alternatively, you can get in touch with the customer care team to check the minimum amount due.
The minimum amount due must be paid on or before the payment due date. Check with your credit card issuer to know the cut-off time for your minimum payment.
You can pay the minimum amount due using any of the following methods – online transfers from your bank account, digital wallets or cheque. If you’re issuing a cheque, make sure that your payment reaches the credit card company before the due date.
Ensure that you pay the minimum amount due well ahead of time to avoid late charges and other penalties.
Benefits of paying the Minimum Amount Due on your Credit Card
As mentioned above, paying the minimum amount due helps you delay paying the entire outstanding amount. It is incredibly helpful when you have unexpected expenses in a month and are unable to pay your current unpaid credit card bill. In such cases, you can pay the minimum amount due for this month and pay the rest in the subsequent month.
Additionally, paying the minimum amount due helps you avoid the late payment fees. Generally, most credit card companies charge a flat-rate late payment fee, which ranges from Rs. 100 to Rs. 1000 and more for late credit card payments. You can avoid this charge, by paying the minimum amount due within the due date.
However, note that, while paying the minimum amount due helps you avoid the late penalty, it doesn’t waive the interest charged on the outstanding bill amount.
What happens if you don’t pay the minimum amount due?
If you fail to pay even the minimum amount due before the due date, you incur late payment fees, interest on the entire outstanding balance and other charges. Additionally, the card issuer may suspend your card, if you have crossed the available credit limit.
Missing paying the minimum amount due makes you forfeit any promotional interest rate offers on your card. Also, when you miss subsequent payments, your credit card company may increase the interest rate levied on your card.
And, not to forget, failure to pay the minimum amount due seriously affects your creditworthiness and credit scores. When your credit card payment is more than 30 days late, the card company notifies it to the credit bureaus. The late fee is noted on your credit history and can remain there for several years. It makes it difficult for you to avail loans or apply for other credit cards in the future.
Missing paying the minimum amount due raises your subsequent minimum amount. With each missed payment, it becomes harder and harder to catch up on all your payments.
What happens if you only pay the minimum amount due?
Paying the minimum amount due at the end of the monthly cycle helps you reduce your monthly budget woes, especially if you have overspent in a particular month. However, falling into the habit of just paying the minimum amount due every month leads you to bigger debt traps.
When you pay only the minimum amount due month after month, the total outstanding bill value multiplies quickly. While most credit cards offer a nominal monthly interest, the annual interest rate is much higher. Also, the outstanding amount pending every month attracts interest, which can further increase your debts.
Let's assume that the outstanding balance on your credit card is Rs. 5000 in a month. Assuming that you pay only the minimum amount due (which is Rs. 200, 5% of the outstanding amount), it will take you forty-four months to settle the entire unpaid bill. Remember, this calculation is made without considering the interest incurred on the outstanding amount and assuming that no further spends are made using the card.
Pay the Entire Outstanding Balance on your Credit Card
It's always best to pay the balance in full, to avoid falling into the trap of credit card debt. Remember that when you pay the minimum amount due, your credit card debt falls only by a small amount. The outstanding balances could add up quickly, causing you to fall into a debt trap, impacting your credit scores as well. Hence, it's always recommended to pay the outstanding balance in full and avoid the habit of just paying the minimum amount due.
While it's okay to pay the minimum amount due in emergencies, ensure that you don't make it a regular practice. Financial advisors recommend that you don't use up more than 50% of the available credit limit in a month. Also, make sure to settle your credit card balances in full, well before the due date, to avoid falling into a credit card debt trap.