Are you paying minimum amount due on your credit cards? Know the implications

While there are several uses of credit cards, if not managed well, they can damage your personal finances.

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All credit card issuers ask for a minimum of 5 per cent of the outstanding amount to be paid by the due date.

While making an online purchase or even while shopping, dining or doing any financial transaction, credit cards have become omnipresent in the world of consumerism. Soon, credit cards could be used to make UPI transactions as well. While there are several uses of credit cards, if not managed well, they can damage your personal finances. If you as a credit card user pay only the minimum amount due each month, you are asking for trouble. Read on to know how.

Credit card statement is generated at a fixed date and the card holder is asked to pay the outstanding amount by the due date as printed on the statement. As a card holder you have three options

1. Pay in full

2. Pay any amount up to the outstanding dues

3. Pay a minimum of 5 per cent of dues

All credit card issuers ask for a minimum of 5 per cent of the outstanding amount to be paid by the due date. Minimum Amount Due is the minimum amount of money, as a part of the total bill amount, that a cardholder has to pay to not be treated as an overdue bill. By paying the minimum amount, you can avoid paying any late fee. In case, you miss the due date and do not pay any amount, there is a late fee payment. The next month’s statement will carry the outstanding unpaid amount along with the calculation of interest to be paid in the next billing cycle.

If you pay only the minimum due amount, there could be two implications:

One, there will be an interest charge levied on the outstanding amount that gets rolled over to the next month’s billing cycle. The outstanding dues will keep increasing which may lead to a debt-trap for you.

Secondly, as you haven’t paid in full, the interest-free period which generally is up to 45 days is lost. You will be paying interest on every new purchase made till the entire dues are paid.

RBI also makes it clear for the credit card issues to keep cardholders aware of the implications of paying only the minimum amount due.

This is what card issuers need to put it in writing – A legend/warning to the effect that ‘Making only the minimum payment every month would result in the repayment stretching over months/years with consequential compounded interest payment on your outstanding balance’ is to be prominently displayed in all the billing statements to caution the cardholders about the pitfalls in paying only the minimum amount due. The most important terms and conditions (MITC) of credit cards will also inform that the ‘interest-free credit period’ is suspended if any balance of the previous month’s bill is outstanding.

Never make ‘paying the minimum amount’ a norm or a habit required unless hard pressed for funds. It may also impact your credit profile resulting in a lower credit score. It’s better to give standing instructions to your banker to debit your bank account regularly on the credit card due date. Keep using credit cards but keep your slate clean with no dues and without rolling over credit to the next month.

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