Paying Minimum Amount Due on Credit Card: Know the Risks

If you are an impulsive buyer, you must have been a victim of over-purchasing. Having a credit card sometimes gives you an assurance that you can buy what you want. Most of the time you think it is manageable as the payment part comes later. But the realisation comes with the bill. 

However, creditors have come up with a solution where you can pay “minimum amount due”, where you have to pay a part of your bill and you can pay the remaining balance afterwards. This might seem like a feasible solution, but there are some drawbacks that you should be aware of. Find these in detail in this article.  

What Is the Minimum Amount Due on Credit Cards?

The term “Minimum Payment Due” simply refers to a minimal portion of your total debt mentioned on your account that you are required to pay to your bank when you are unable to pay the whole amount.

Minimum payment is usually 5% of the entire amount owed. Any amount that you changed from credit card payments to EMIs is added. This amount is also increased by any outstanding balance from the previous billing cycle.

How to Calculate the Minimum Amount Due? 

As previously discussed, most creditors set 5% of your total remaining balance as the minimum amount due. Also, any EMIs and outstanding balance are added to your billing cycle. 

Let’s take a look at the following illustration to understand how this minimum amount due is calculated: 

Suppose, your credit card company generates a bill on 25^th of every month and your latest payment date is by 4^th of next month. 

If you have made purchases worth ₹10,000 before 25^th of February, your minimum amount due will be 5% of the total amount which is ₹500. You need to pay this amount on or before 4^th of March to avoid any late penalty. 

Now, you will not have to pay any interest on ₹500. But your creditor will levy a late penalty or interest on the outstanding balance of ₹9,500 of suppose 4% each month until you clear your whole bill. 

If you calculate the amount you have spent from your card, your outstanding balance is ₹16,500. Rest of this amount in ₹17,160 is interest payable on the total outstanding amount. It will keep adding till you pay off the due. 

Implications of Paying Minimum Amount Due on Credit Cards 

If you are thinking that you have dodged a penalty by paying the minimum amount due, then you are not getting it right. The interest is applicable to the due payable amount. The higher the due, the more interest you will have to pay. If you keep postponing the payment, eventually you will exhaust your credit limit. 

Here are a few reasons why paying the minimum due is not a solution: 

• Every month that you postpone complete payment, the minimum amount rises as the balance of the current month is transferred to the minimum of the following month.
• Remaining debt is carried forward and subject to interest once the minimum payment is made.
• Amount that isn’t repaid gets deducted from your credit limit. As a result, you might not be able to use your credit card as needed.
• Instead of at the conclusion of the billing cycle, interest is applied to start on the date of purchase. As a result, each time you pay just the minimum amount, interest is charged on that amount as of the first payment, so you essentially forfeit the advantages of the grace period.

Benefits of Paying Minimum Amount Due on Credit Cards 

Even though there are mostly drawbacks to this facility, there are some benefits that you can have a look at.

• You can continue using the card for the full available credit limit if you pay the minimum payment to keep your credit active (excluding the amount converted to EMI)
• If you only pay the minimum amount due, the bank will not mark your payment as a “default” in the credit history. 
• You can avoid paying late fees.
• Enables you to manage your credit more effectively, particularly during a financial crisis.
• Your credit score doesn’t get affected. 

Final Word 

Minimum amount due facility works fine for a short term. You should note that the less amount you pay as a minimum amount due, the higher amount you have to pay on the outstanding amount. Hence, if you find yourself in such a situation frequently, maybe you should reconsider your budget or have a stricter mindset about spending. 

Frequently Asked Questions