A credit card bill consists of three amounts to be paid. The minimum amount that is due, the total amount to be paid as per the statement, and the current balance. A credit card minimum due is the minimum amount of money the cardholder has to pay to avoid late payment of fees. This minimum amount should be paid on or ahead of the due date of payment. In such situations, where the cardholder pays only the credit card minimum due, the bank charges interest on the rest of the statement balance. Ideally, the cardholder should pay the entire bill amount every month.
Calculation of credit card minimum due
It is typically 5% of the total amount outstanding on the credit card bill
The total of all instalments, interest, any other bank charges, the amount utilized above the credit limit, and 1% of the balance outstanding that is remaining.
The minimum amount due is always the higher of the two amounts.
- If the cardholder converts the purchases into EMIs, the credit card interest will get added to this minimum amount due.
For example :
Total amount outstanding: Rs. 1000/-
Minimum Amount Due: 1000×5%= Rs. 50/-
If the outstanding bill amount is Rs. 1000/- and the cardholder pays the minimum due, then the amount outstanding changes to Rs. 950/-. Now, the cardholder has Rs. 950/- less to utilize in the next cycle. Also, the credit card interest is charged on this Rs.950/- from the date the purchase is made.
Benefits of paying the credit card minimum due
- Keeps the card active: The credit card continues to be active and the cardholder may use the total credit balance available. It is the balance after deducting the outstanding credit. If the cardholder does not pay the minimum amount due, the card may get blocked not allowing any further transactions. This will allow him to continue using the card to the extent of the available credit balance.
- Maintaining credit score: By paying the minimum due, the cardholder ensures the stability of his credit score. Banks will not classify one in the default list if it is a one-time instance and the credit record remains intact. It helps keep the repayment record clean in case of an urgency of funds.
- Avoiding late payment fees: Paying the credit card minimum due ensures that late payment fees are not levied. Only the credit card interest needs to be paid and any penalty can be avoided.
- Helps in a financial crisis: During a financial crisis, where one needs money like a hospital emergency, paying the minimum due will ensure that the cardholder doesn’t default.
Disadvantages of paying only the credit card minimum due :
Paying the minimum due amount seems comfortable and may offer a view that the credit is sustainable. But this is only a short-term view. There are various risks in paying only the credit card minimum due. It is continually encouraged to pay the total outstanding bill on the credit card. Let’s understand why:
- Missing out on interest-free period:
One major attraction in availing a credit card is the interest-free credit period of two months. Additionally, a period of three weeks is offered by banks, to clear the outstanding amount after issuance of the statement. By paying only the minimum due, the cardholder misses out on this great advantage. Instead, credit card interest will be charged from the purchase date.
- Paying more interest: The interest rates on credit cards are high. Paying only the minimum amount due regularly will push one into further debt and the cardholder will have to shell out a huge portion on the interest. A major point to note is that banks start charging the interest from the date of purchase and not from the due date of the bill.
- Reduced credit limit: By paying only the minimum due, the outstanding amount on the credit card keeps accumulating. The result is that the credit limit falls. Thus, the purpose of using a credit card for liquidity is lost.
- Hit on Credit Score: Paying the minimum due on a credit card as a one-time case is acceptable and will not affect the credit score. However, the cardholder’s credit score will be severely hit if he pays only the minimum amount due regularly. This adversely affects the repayment track record and availing of any new loans or credit may be difficult.
Is it okay to pay only the minimum amount due on a credit card habitually?
Credit cards are one of the best financial resources that offer high liquidity. They come with a host of benefits but need to be used wisely. Paying the minimum due amount is best used during an emergency or a crisis. If the cardholder ends up paying only the minimum amount due most of the time, it may be prudent to recalculate and reallocate their finances.