Every time you receive your credit card bill, at the bottom it says: ‘MINIMUM PAYMENT DUE’ and the amount demanded is only 5% of the bill.
Most credit cards such as VISA and MasterCard allow you to pay only the minimum balance each month and finance the rest. The minimum payment facility is generally 5% of the monthly bill. Great! Isn’t’ it? But don’t fall for the bait. Although it may look very convenient now, but its’ bound to lead to financial trouble in the future.
Credit cards come with some preset credit limit. Say your card has a credit limit of Rs 50,000 and when you make a purchase through the credit card the limit decreases with the amount of purchase, for that month. Suppose you buy Rs 5,000 worth of goods, you credit limit for the month is reduced by the amount till the amount is paid to the bank. You repay the purchase amount to the card-issuing bank when you make the payment for the monthly bill for credit card. The credit limit of your card is restored to its original level, Rs 50,000.
As you use the card, you borrow against your limit and repay the money when you make the payment for the bill. If you pay off your balance in full each month, no interest charges accrues but the interest charged for carrying forward the payment is about 3% (varies from bank to bank) per month. This 3% per month effectively works out to over 40% per annum. A person who rolls a part of the bill (generally 5%) over to the next month is inviting trouble and heading for a debt trap. For example if your balance on card is Rs 30,000, and each month you pay only the minimum 5% of the outstanding credit, it will take you over 10 years to clear off the card due! The interest payment will be even more than the principal you borrowed, assuming that you pay up all your other card dues in full each month.
So, a credit card has significant convenience value. It spares you from time-consuming visits to the bank when you need to borrow. It becomes very handy at the time of emergency adding to all these is the 40-50 days interest-free credit period if you pay off your bill before due date each month in full. But a word of caution – the convenience of a credit card can make buying your favorite things very easy, resulting in an accumulation of a large balance on your card. You could end up becoming a slave to this instrument. You might end up paying too much. Be a smart spender and always make sure the payment for your credit card bill is on time.
