When you use a credit card, you are basically taking a loan. You are provided an interest-free period in which you are charged no interest on this loan. A timely, full repayment leads to no interest charges and late payment penalties.
When you use a credit card, you are basically taking a loan. You are provided an interest-free period in which you are charged no interest on this loan. A timely, full repayment leads to no interest charges and late payment penalties. You also have the option of making a minimum payment—typically, 5% of the outstanding card balance to avoid paying penalties, but you still need to pay interest. If you continue making only minimum payments on your credit card, how long would it take to settle your card balance? Theoretically, the answer is forever. If you continue making only minimum payments towards your card dues, you would never get out of debt. Of course, this is only in theory. You can, at any moment, make a lump sum repayment and settle your card balance. However, credit card interest rates are high. Repeatedly making only minimum payments would keep you in debt for a long time.
What is minimum payment?
Let’s say you made a purchase of Rs 10,000 on your credit card. You receive your card statement which shows your minimum dues as Rs 500, i.e., 5% of the total dues. If you pay this amount, you’ll not be charged late payment fees. But the remaining balance of Rs 9,500 would continue to attract a monthly interest rate of 2-4% per month. Once annualised, this rate of interest may mean 25-50% a year. This makes credit card debt one of the most expensive debts out there, and hence it should be used with care. Let’s say you carried forward a balance of Rs 9,500 in the above example. Suppose your monthly card interest rate is 4%. Your pending balance next month would be Rs 9,880. If you made a further purchase of `10,000, there would no longer be an interest-free period. The entire amount of Rs 19,880 would attract interest. As with any loan, you must make timely repayments as well. As much as you can, settle your card balance in the interest-free period. If you can’t, pro-actively work on reducing your card debt in a short span of time, given that it would be your most expensive debt. You can use your credit card as much as you want as long as you can comfortably repay the balance in a timely manner. But as a general rule, try and remain within 30% of your card spending limit.