Why Paying Minimum Dues on Credit Cards Is a BIG Mistake!

Oct 26, 2023 / Reading Time: Approx. 5 mins

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Why Paying Minimum Dues on Credit Cards Is a BIG Mistake!

In an era of financial convenience, credit cards have emerged as an indispensable tool, offering a lifeline during unforeseen financial crises. Due to their versatility and accessibility, credit cards have become a reliable solution for various payment needs, providing us with a sense of financial security. However, while these plastic cards empower us with the freedom to spend, they also present a subtle trap that many find themselves caught in. It is the allure of making only the minimum payments on your credit cards, which can appear as an enticing option when finances are tight.

However, making the minimum payment on your credit card does more harm than good. In this article, we will explore the reasons why adhering to this strategy may not be as prudent as it initially appears, explaining the hidden consequences that can erode your financial well-being.

What Is 'Minimum Dues on the Credit Card' or 'Pay the Minimum Amount on Credit Card'?

Each month, credit card holders receive a billing statement, which is typically divided into two components: the 'total amount due' and the 'minimum payment required'. The minimum payment represents a relatively modest fraction of the overall bill and is designed to help customers avoid late payment penalties.

The minimum payment required typically falls within the range of 5% to 15% of the total outstanding balance on your credit card, depending on the terms of the credit card provider and your credit profile. Additionally, if you have opted for any payments to be converted into Equated Monthly Instalments (EMI), this EMI amount is combined with the minimum payment. Furthermore, any remaining unpaid balance from the previous billing cycle is included in the calculation of the minimum amount due. Consequently, if you do not have a good repayment history, your total amount due and minimum payment required could be the same.

For example, suppose your total bill amounts to Rs 35,000. In this scenario, the minimum payment, typically varying between banks and your profile, might be Rs 3,500. This amount is usually quite manageable for most individuals. Therefore, if you remit Rs 3,500 towards your Rs 35,000 bill, you will avoid any penalty charges.

What Are the Benefits of Paying the Minimum Amount Due on Your Credit Card?

Paying the minimum amount due on your credit card offers several benefits that can help maintain your financial stability and creditworthiness.

1. Credit Card Continuity:

By settling the minimum payment requirement, you ensure that your credit card remains active, allowing you to continue using it up to your total available credit limit (excluding amounts converted to EMI).

2. Credit Score Protection:

Paying the minimum amount due safeguards your credit score. It prevents your payment from being categorised as a 'default' in your credit record, ensuring your creditworthiness remains intact. This, in turn, can positively impact your ability to secure loans or favourable financial opportunities in the future.

3. No Late Payment Fees:

Making the minimum payment on time helps you steer clear of late payment fees, saving you from unnecessary additional expenses.

4. Interest-only Charges:

Paying the minimum amount due ensures you will incur only interest charges when required, with no penalty or extra late payment costs.

5. Positive Credit History:

Your credit card company or issuing bank won't report you as irregular to credit bureaus when you consistently make minimum amount due payments, thereby preserving your positive credit history.

Why Should You Not Pay Only the Minimum Amount Due On Your Credit Card?

Although it is prudent to make minimum payments when you are facing financial difficulties, establishing a routine of making a habit of doing so even when you have the means to settle your debts can lead to significant negative consequences. Here's why:

1. Accrual of Interest:

Clearing the entire balance before the due date benefits you with an interest-free credit period extending up to two months. On the contrary, paying solely the minimum amount due does not grant you any interest-free credit period.

However, when you pay off the entire outstanding balance on your credit card, your bank provides you with an interest-free credit period. In contrast, if you confine your payments to just the minimum dues, you will be subjected to additional interest charges on the outstanding balance, dating back to the time of the purchase.

The more substantial the outstanding debt, the higher the interest rate you will incur. Over time, these interest rates tend to rise as the bank assesses your repayment habits and perceives higher risk, subsequently charging you higher interest rates.

2. Impact on Credit Score:

The more you rely on your credit card and accumulate debt in your monthly statements, the more direct the effect on your credit score. As the debt accumulates, the interest rates you are charged have a direct influence on your credit score. A lower credit score can become a significant hurdle if you require loans in the future.

3. Debt Spiral:

Consistently making minimum payments on your credit card can lead to a perilous situation known as a "debt trap." In such a scenario, the outstanding debt accumulates to the extent that it becomes increasingly challenging to repay in a timely manner, potentially necessitating additional loans to settle your credit card obligations.

In summary:

The real strategy for saving money with credit cards depends on your approach to repayment. It is advisable to start by repaying as much as you can right from the outset, as credit cards offer numerous cost-saving opportunities. However, opting for the minimum payment option wisely and subsequently ensuring timely debt repayment can help you avoid excessive fees and charges.

It is essential to understand that the smaller the portion of the outstanding balance you settle, the higher the amount of interest you will be obligated to pay. While making only the minimum payment when you lack sufficient funds to clear your credit card bills is acceptable, this approach is effective only in the short term.

If you find yourself consistently in such a situation, it is advisable to re-evaluate your budget and proactively plan your expenses. If your credit card debts become overwhelming, you might consider options such as availing of a personal loan or credit card balance transfer to alleviate the situation.

It's crucial to exercise financial responsibility in your spending habits and steer clear of the pitfalls of accumulating debt in the future.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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