When individuals cannot pay the entire credit card bill, they  can pay only the minimum amount due. The minimum amount due refers to the small part of the total amount due which you must compulsorily pay to the bank in case you cannot pay the bill completely. All credit card issuers have fixed the minimum amount due as 5 percent of the outstanding credit card bill. 

The Minimum amount due comes as a savior when you cannot pay your bill in entirety. However, paying only the minimum amount due every month will lead to accumulation of interest. Let us now see the benefits and disadvantages of paying only the minimum amount due and also know how the interest gets computed.   

What Are The Pros of Paying Only The Minimum Amount 

Due?

Here are some benefits of paying only the minimum amount due, and they are as

follows:

  • You can keep your credit active by paying the minimum amount. If you don’t pay even the minimum amount, your credit card will be blocked for the entire credit limit. On the other hand, if you pay the minimum amount, you can continue to use the card for the remaining available credit limit except for the  amount converted to EMI. 
  • Paying the minimum amount due will help you avoid penalty for late payments.

What Are The Cons of Paying Only The Minimum Amount 

Due?

  •  Your credit utilization ratio can be defined as the percentage of credit that you are using out of the total credit limit available. If you are paying only the minimum amount due every month, then the balance due on your credit card will increase and this will lead to a hike in the percentage of credit used. This will cause a rise in your CUR. For maintaining a good credit score, your CUR should be within 30%. 
  • If you have not paid your credit card outstanding in full, you will not be eligible for any interest free credit period which is up to 45 days.
  • When you pay only the minimum amount due, the interest that you have to pay on the balance outstanding on your credit card (including all new transactions) keeps getting accumulated until you clear your dues.  

How Is The Interest Computed?

  • The interest rate on credit cards is usually c omputed based on the interest rate applicable for the entire year or the annual percentage rate - APR
  • For monthly credit card dues, the monthly percentage rate or the MPR is  used. 
  • You should check with your credit card issuer for the APR, since both the MPR and APR may vary across banks.

What Is The Formula For APR?

(Number of days counted from the transaction date * Outstanding amount * Interest rate per month * 12 months)/365

What is the Formula For MPR?

MPR = APR/Number of billing cycles per year

For example, if your APR is 15%, and you have 12 billing cycles in a year, Your MPR = 20/12 = 1.25%.  

Let us look at an example. 

Billing Cycle: From 1st to 30th of the month

Due Date: 15th 

Credit Card Bill generated in first month : Rs. 1,00000 in month 1

Amount transacted on the 14th using credit card: Rs. 50,000

Amount transacted on the 16th using credit card : Rs. 20,000

Amount transacted on the 25th using credit card: Rs. 10,000

Amount transacted on the 29th using credit card: Rs. 20,000

Suppose you pay Rs. 50,000 before the due date and decide to revolve the rest. And, you are not making any credit card purchases in month 2. In this scenario, the interest for the credit card bill of month 2 will be computed as follows:

(Number of days from transaction date x outstanding amount x Interest rate per month x 12 months)/365. 

[(14+30) x 20,000 x 1.25% x 12]/365 + [(5+30) x 10000 x 1.25% x 12]/365 + [(1+30)] x 20,000 x 1.25% x 12]/365 will be the interest amount you have to pay after the month 2 along with the outstanding bill.

Conclusion

So, can you pay only the minimum amount due? While it is okay to pay the minimum amount due when you are facing a cash crunch since you can avoid late penalties and protect your credit score, it is not ideal to make it a habit. This is because your outstanding balance will get carried forward to the next month along with the interest levied on the outstanding balance. This amount will keep on accumulating and it may lead to a debt trap. 

FAQs

What is the most effective method for settling your credit card bill?

It is always good to pay your credit card bill in full. If you pay only the minimum amount due, it will take you a much longer time to pay off your bill completely. This is because the next time you pay your bill, you will have to pay interest on the amount due plus the amount outstanding.  If you pay your credit card bill in full, then you will get an interest free credit period from the bank.

What will happen if I pay only the minimum amount due every time?

If you pay only the minimum amount due every time, then the amount of interest that you will roll out will be huge. You will not be eligible for the interest free credit period offered by the bank. The credit limit will also reduce drastically since the outstanding amount gets deducted from your total available credit limit