Minimum due, maximum risk
Paying only the minimum due on your credit card will not help as interest is charged
The utilisation of available credit limits of credit card holders varies every month. Some may make use of the entire credit limit and some may be conscious about their credit card purchases. Depending on their spends, some users may have been saddled with a hefty bill due to unavoidable or impulsive spending. At such times, it is more likely that the term “minimum payment due” on their bill statement will catch the eyes of many individuals. Is it wise to pay just this minimum due and carry forward the balance to the next month bill cycle? Here we look at what it means and the pros and cons of the term “minimum payment due” on the credit-card bill.
What is it?
The minimum payment due is a certain per cent of the total outstanding amount due for payment. In general, it is 5 per cent of the total outstanding balance. That is, if your outstanding balance due for payment on your credit card in a particular month is Rs. 10,000, then the minimum payment due for that month would be Rs. 500 (5 per cent of Rs. 10,000). So, is it enough if I pay only Rs. 500 for that month? Yes, if you pay this minimum due, you will not be considered a defaulter. Sounds good? Not really.
There is a myth in the market that one will not be charged the interest rate if he pays only his minimum due. Aditya Agarwal, Founder, Wealthy.in says, “That is not the case. Only the late fee is not levied in this case. But the interest is charged on the balance amount and will be added to your next month billing cycle.”
Higher charges
Annual Percentage Rate (APR) is the term used for interest charged on credit cards. This APR is huge compared to other loan instruments. For instance, Axis Bank charges 46.78 per cent per annum (3.25 per cent per month) for its “My Choice Credit Cards” variety. While State Bank of India charges 40.2 per cent a year, for ICICI Bank, it varies between 30 and 42 per cent, depending on the type of card you hold.
Say, you have paid only Rs. 500 (the minimum amount due) of your total bill value of Rs. 10,000 for August. In the next month bill, the APR will be charged on the previous month due amount of Rs. 9,500 and it will be added to that month amount. If you have spent Rs. 5,000 in September, then, the next month outstanding balance will be Rs. 5,000 (current month spending) + Rs. 9,500 (previous month balance) + the APR charged on the previous month balance of Rs. 9,500.
So, what happens if I continue to pay only the minimum amount due for a prolonged period of time? The APR on the balance amount will get accumulated and at one point in time you will reach or even exceed your total credit limit. Once the credit limit is exceeded, you will be asked to pay the minimum due plus the amount by which you have exceeded your total credit limit. Say, for example, if your credit limit is Rs. 1,00,000, but upon accumulation by just paying only the minimum due, your current month total bill comes at Rs. 1,25,000. Then you have to pay the minimum amount due of Rs. 6,250 (5 per cent of Rs. 1,25,000) plus Rs. 25,000 (the excess amount above total limit)
Getting into a debt trap
So, ideally, paying only the minimum payment due on your credit card will only increase your outflow since interest is charged. Ranjit Punja, CEO & Co-Founder, Credit Mantri, says, “If you keep on paying only the minimum amount due, the outstanding does not reduce at all or there will be only a marginal reduction in the outstanding since the APR gets accumulated with every bill cycle.”
Also, the major advantage of getting the free credit period, which is available only for credit card spending, will be lost as you end up paying interest charges. In addition, it will also increase your credit utilisation ratio (outstanding balance divided by the total credit limit). A higher utilisation ratio has a negative impact on your credit score.
Credit card is one of the easiest ways of taking a short-term loan. But the higher interest rate in the form of APR makes credit cards the most expensive unsecured form of loan. So make sure that you always pay the entire bill amount to insulate yourself from a debt trap.
With inputs from The Economic TImes , The Hindu & Financial Express
The utilisation of available credit limits of credit card holders varies every month. Some may make use of the entire credit limit and some may be conscious about their credit card purchases. Depending on their spends, some users may have been saddled with a hefty bill due to unavoidable or impulsive spending. At such times, it is more likely that the term “minimum payment due” on their bill statement will catch the eyes of many individuals. Is it wise to pay just this minimum due and carry forward the balance to the next month bill cycle? Here we look at what it means and the pros and cons of the term “minimum payment due” on the credit-card bill.
What is it?
The minimum payment due is a certain per cent of the total outstanding amount due for payment. In general, it is 5 per cent of the total outstanding balance. That is, if your outstanding balance due for payment on your credit card in a particular month is Rs. 10,000, then the minimum payment due for that month would be Rs. 500 (5 per cent of Rs. 10,000). So, is it enough if I pay only Rs. 500 for that month? Yes, if you pay this minimum due, you will not be considered a defaulter. Sounds good? Not really.
There is a myth in the market that one will not be charged the interest rate if he pays only his minimum due. Aditya Agarwal, Founder, Wealthy.in says, “That is not the case. Only the late fee is not levied in this case. But the interest is charged on the balance amount and will be added to your next month billing cycle.”
Higher charges
Annual Percentage Rate (APR) is the term used for interest charged on credit cards. This APR is huge compared to other loan instruments. For instance, Axis Bank charges 46.78 per cent per annum (3.25 per cent per month) for its “My Choice Credit Cards” variety. While State Bank of India charges 40.2 per cent a year, for ICICI Bank, it varies between 30 and 42 per cent, depending on the type of card you hold.
Say, you have paid only Rs. 500 (the minimum amount due) of your total bill value of Rs. 10,000 for August. In the next month bill, the APR will be charged on the previous month due amount of Rs. 9,500 and it will be added to that month amount. If you have spent Rs. 5,000 in September, then, the next month outstanding balance will be Rs. 5,000 (current month spending) + Rs. 9,500 (previous month balance) + the APR charged on the previous month balance of Rs. 9,500.
So, what happens if I continue to pay only the minimum amount due for a prolonged period of time? The APR on the balance amount will get accumulated and at one point in time you will reach or even exceed your total credit limit. Once the credit limit is exceeded, you will be asked to pay the minimum due plus the amount by which you have exceeded your total credit limit. Say, for example, if your credit limit is Rs. 1,00,000, but upon accumulation by just paying only the minimum due, your current month total bill comes at Rs. 1,25,000. Then you have to pay the minimum amount due of Rs. 6,250 (5 per cent of Rs. 1,25,000) plus Rs. 25,000 (the excess amount above total limit)
Getting into a debt trap
So, ideally, paying only the minimum payment due on your credit card will only increase your outflow since interest is charged. Ranjit Punja, CEO & Co-Founder, Credit Mantri, says, “If you keep on paying only the minimum amount due, the outstanding does not reduce at all or there will be only a marginal reduction in the outstanding since the APR gets accumulated with every bill cycle.”
Also, the major advantage of getting the free credit period, which is available only for credit card spending, will be lost as you end up paying interest charges. In addition, it will also increase your credit utilisation ratio (outstanding balance divided by the total credit limit). A higher utilisation ratio has a negative impact on your credit score.
Credit card is one of the easiest ways of taking a short-term loan. But the higher interest rate in the form of APR makes credit cards the most expensive unsecured form of loan. So make sure that you always pay the entire bill amount to insulate yourself from a debt trap.
With inputs from The Economic TImes , The Hindu & Financial Express