Don’t Fall for the Minimum Amount Due Trap; Your Credit Card is Counting on You To

The credit card minimum amount due is the minimum amount you are expected to pay at the end of your billing cycle. Apart from this, your monthly credit card bill will contain the bill due amount and the total outstanding amount. Although it would appear that paying your credit card minimum amount is a temporary solution to your financial problems, it will add to your mountain of debt. How? Well, this blog will explain just that.

When you pay the minimum amount on your credit card, your issuer applies interest to the remaining balance of that billing cycle. And this interest is usually high. The interest applied and the previous balance are added to your next bill. In essence, it creates a snowball effect, increasing your debt with every billing cycle.

How Do Credit Card Companies Calculate Minimum Due?

Usually, the minimum due amount varies between credit cards. However, as a benchmark, the minimum due is 5% of the monthly bill amount.

Example: Say your bill amount is Rs 10,000. The minimum due would be 5% of Rs 10,000, i.e., Rs 500.

If you pay the minimum due amount, it doesn’t mean the balance of Rs 9,500 is forgiven. This amount will incur an interest, which gets added to your subsequent bill.

The Dangers of Paying Credit Card Minimum Amount Due

High Interest

The biggest risk of paying the minimum amount in credit card bill is attracting high interest. You will be trapped in a debt spiral because the balance amount attracts interest and is pushed to the next billing cycle. The subsequent overwhelming bills will nudge you to pay the credit card minimum due again and attract more interest. Eventually, you would have paid more interest than the original borrowed sum.

Longer Debt Period

By paying the credit card minimum amount due, you are prolonging the duration of repaying your debt. This will result in long-term financial misery.

Bad Creditworthiness

Creditworthiness measures your reliability to receive a credit and repay it timely. The more punctual you are in repaying your monthly bills, the higher your creditworthiness. If you, however, get into the habit of paying just the credit card minimum amount and accumulate high-interest debt, your creditworthiness drops and is reflected in your credit score. Future lenders will see this as a sign of poor financial decisions. It will decrease your chances of getting low-interest loans.

Tips to Escape Credit Card Debt

• Prioritise your payments. Pay off all high-interest debt as early as possible.
• Repay your high-interest debt, and pay the full credit card bill three days before its due date.
• Look for credit card balance transfer options. You can find many lenders willing to provide this feature. This way, you can save on high interest rates.
• Consider taking a short-term personal loan to clear your credit card debt. The interest rates of personal loans will be lower than credit cards.
• Minimise expenses and pause your investments while you’re clearing your debt.
• Think about alternate income streams by capitalising on your skills and passions.

Summing Up

While it is tempting to pay the minimum due on your credit card, it isn’t a good practice. It may take you out of a financial pinch for a month, but high-interest debt is not something you’d want on your credit history. As your debt piles on, it snowballs into more than you can handle.

Even if you’re stuck in high-interest debt, try PaisaSimple’s tips to ease some of it and reclaim your financial freedom.

A good practice is to pay your bill due entirely without getting into the credit card minimum due trap. Credit card lenders rake in a lot of revenue from this habit. Be responsible with your expenditure and enjoy the perks of having high creditworthiness.