Credit Cards and their benefits are very well known. Due to the ease of its utilization, sometimes overspending on credit card is easy. And when you receive your credit card outstanding statement at the end of the month, it may seem difficult to pay up the entire amount that is shown as outstanding.
To help the user in these kinds of situations, the credit card outstanding statement comes with 2 figures:
Total Amount Due - That is a total of all your spending during the month (Assuming all balances at the end of last billing cycle were paid)
Minimum Amount Due - An amount lower than the total amount due
As a user of the credit card, you have the option of choosing one of the above-mentioned amounts as on the date of payment.
How is the Minimum Amount Due calculated?
Minimum amount due is generally calculated at 3- 5% of the total outstanding amount as on the date of generation of the statement. The Minimum Amount Due may also be set at a minimum of an amount or a percentage of the total spend, whichever is lower. Or it could change according to the internal policies of the bank.
The best place to know the Minimum Amount Due on your Credit Card can either be your statement or the booklet of terms and conditions that is sent along with your card initially. The charges may be available on the website of the Credit Card Issuer.
Let us take an example to illustrate this better.
The credit card billing is generated on the 20th of each month with payment due on 05th of the next month. The minimum amount due is assumed as 5% of the Outstanding and the APR is 3% pm.
|Transaction Date||Nature of Spending||Amount Spent|
|25 May 2019||Online Purchase||Rs 5000|
|05 June 2019||Air Ticket||Rs 15000|
|20 June 2019||Total Amount Outstanding||Rs 20000|
|Minimum Amount Due||Rs 1000|
Additional Reading: How does credit card affect your credit score?
What are the Advantages of Paying Minimum Amount Due?
Your credit card issuers allow you the option of paying a lower sum than the total outstanding. You must be wondering if there are any advantages of paying just the minimum amount due instead of the entire amount. Of course, there are advantages of paying the Minimum Amount Due.
Saves you from paying the Late Payment Fee. If the minimum amount due is also not paid by the due date then you are charged a late payment fee by the credit card issuer which generally depends upon the amount that is due.
Rs. 300 - if Total Payment Due is up to Rs. 2000
Rs. 400 - if Total Payment Due is between Rs. 2001 - Rs. 5000
Rs. 600 - if Total Payment Due is Rs. 5001 or more
For Example: On Axis Bank Select Credit Card, the following charges are levied
Allows you to manage your finances better, especially in cases of emergency situations.
Prevents the credit card issuers from reporting your account as irregular.
Does not affect your credit score.
However, if everything looks as rosy as it seems, then why should anyone pay the total amount due? This may be the question on your mind. Are there any consequences of not paying the total amount due? Is it advisable to pay just the minimum amount due?
CreditMantri, your Credit Coach, understands the importance of making you aware of both the sides of the coin so that you are enabled to make an informed decision on matters regarding your credit. Hence, we will elaborate on the disadvantages of paying just the minimum amount due on your credit card.
Why Paying Just the Minimum Due is Not a Good Idea?
As in the example given above, the minimum amount due is just 5% of the total amount due. You might have also learned that paying just the minimum amount due also works in your favor in certain situations.
But your responsibility towards the rest of the amount outstanding does not end here. You are very much liable to pay off the rest of the amount too. As you have not paid your total amount due, the amount unpaid by the end of the payment date is liable to be charged interest.
The amount unpaid by the end of the payment date has ideally beyond the interest-free period offered by the Credit Card Issuer, hence is charged interest
Let us continue with our example to see how the interest is worked on the unpaid amount and what is the status of any further usage on the credit card.
|Transaction Date||Nature of Spending /Payment||Amount Spent|
|20 June 2019||Total Amount Due||Rs 20000|
|05 July 2019||Minimum Amount Due Paid||Rs 1000|
|05 July 2019||Outstanding Balance||Rs 19000|
|10 July 2019||Online Purchase||Rs 2000|
|15 July 2019||Purchase of a Mobile||Rs 15000|
|20 July 2019||Outstanding Balance||Rs 36,380*|
Do you notice the outstanding amount? The earlier outstanding amount was Rs 19000 and a purchase of Rs 17000 was made during the billing cycle. Then why is the figure shown as Rs 36,380 instead of Rs 36,000? It is the interest being charged.
When the total amount outstanding remains unpaid by the Pay by date, the outstanding balance and any new usage of the credit card are also charged interest.
This is what we have noticed above. In addition to interest on outstanding balance, any fresh purchases have also been charged interest for the number of days till the billing date. This amount and any future purchases will continue to be charged interest till the amount is not repaid in full. In other words, you lose your privilege of an interest-free period when you do not pay the total amount due.
You could imagine, very soon the situation can go out of control if the amount remains unpaid and the card continues to be used and the user could end up with a huge debt.
The consequences of just paying minimum amount due can be long-lasting and could end up throwing your finances totally out of balance, which is totally undesirable.
Additional Reading: How to manage your credit card spends
Paying Minimum Amount Due may be used for those one odd cases when your finances are stretched or you are passing through an emergency situation. But do not make it a regular payment strategy. So spend only that you can afford to pay back when using a credit card.