Credit card usage in India has increased swiftly, mostly in recent years, owing to online discounts, cash backs and rewards, along with the interest-free credit period. According to the Reserve Bank of India (RBI), the number of total outstanding credit cards at the end of December 2019 was about 55.33 million and transactions worth Rs 6660.904 billion were conducted through credit cards in that month alone.
The digital push by the government, discounts and cashback offers, ease of doing transactions, and the interest-free credit period of about 45 days mostly contribute to the wide use of credit cards. However, with high spending on credit cards, comes the risk of overspending.
Most people get swayed away with credit cards and end up spending more than they can pay off. This way many cardholders pay up only the minimum amount due, which lands them into a debt trap.
What happens when you pay only the minimum due amount?
When you haven’t paid off your credit card bill, before or on the due date, a minimum amount is shown that you can pay instead of the full amount. This minimum amount can be paid before the payment due date to maintain your card account. Note that paying only the minimum due amount does not waive off the credit card charges, it only doesn’t attract the late fees charged on the credit card. The minimum due amount is only a small portion of the principal outstanding amount every month.
Usually, the calculation of the minimum amount due is 5 per cent of a card holder’s outstanding balance. Having said that, if you have bought something on EMI through your credit card, the percentage can be higher. The minimum amount can also be higher if you have spent more than your credit limit, or haven’t cleared your previous month’s dues.
The unpaid minimum amount due from your previous bills will also get added to your current minimum due amount. Late payment fees that are added to a credit card bill on non-payment of the bill by the due date can be avoided by paying up the minimum amount due. The late payment fee is usually a flat fee which can be anything between Rs 100 to Rs 1,000, depending on the due amount and the credit card provider.
Keep in mind that paying up the minimum amount due does not waive off the interest on the outstanding bill amount.
If you don’t pay the minimum due amount, along with the interest, additional late payment fees, and other charges can also be levied depending on the card provider. Also, your credit card could get suspended once the dues cross the credit limit allowed on your card. Not paying even the minimum amount due can highly affect your creditworthiness and credit score, which will make it hard for you to get a loan in the future.
However, if you start paying up only the minimum amount due, the total bill will multiply quickly, because of the interest charged on credit cards. Generally, most credit cards charge a monthly interest rate between 3 and 4 per cent on the outstanding amount, which attracts an annual interest rate of more than 40 per cent.
Paying just the minimum amount once in a while can be considered if you are short of money, but if you make a habit out of it, you will end up paying double the amount you spend in no time. Industry experts suggest cardholders should not spend more than 50 per cent of their credit limit on their credit card in a month, as spending more than that can have an adverse effect on the card holder’s credit score.