What is the minimum amount due in Credit Card? How Credit Card interest rates eat away into your savings? How the minimum amount due in Credit Card works?
Rahul got his first Credit Card immediately after getting his first job in a software firm. In the 2008 global crisis, he lost his job. He continued using his Credit Card by paying the minimum amount due. Soon his Credit Card bill started seeing big amount which exceeded his credit limit and the card was blocked by the issuing bank. Now he is into a good job, but his Home Loan application was rejected by another bank, because of his poor Credit Score in CIBIL
Rahul is not alone. There are many Credit Card users who are getting into the Credit Card debt trap. Some of them are not aware of the payment conditions and the way the interest is charged in Credit Cards. Credit Card companies will not disclose the real dangers while selling these Credit Cards. Let us see, what is the minimum amount due in Credit Card and of its dangers in your personal finance.
Credit Card Billing Cycle
Credit Card Billing Cycle is the period for which you are liable to pay the dues in a Credit Card. Let as assume that your billing cycle is from 5th April to 4th May and the due date for payment is 25th May. In this case, your monthly bill will be generated on the 4th of every month. The monthly bill will contain all your transactions in the Credit Card for the bill period from 5th April to 4th May. If you have used the Credit Card for Rs. 10,000 on 6th of April, you have to pay that amount only on the 25th of May. You are getting an interest-free credit of around 49 days!
If your total amount due in a billing cycle is Rs. 15,000/- and if the due date is 25th May, your Credit Card statement will contain one more option which is called Minimum Amount Due. Normally, the minimum amount due in the Credit Card will be a small fraction of the total amount due. It will be around 5% of the total amount due in most cases. In the above example, it will be Rs. 750/- (5% of the total amount due of Rs. 15,000). You can either pay the total amount due of Rs. 15,000 on or before the due date of 25th May or pay at least Rs. 750/-, which is the minimum amount due in Credit Card.
Minimum Amount Due in Credit Card – How it works?
The minimum amount due in Credit Card is an amount decided by the card issuing bank. If you pay at least this amount in the Credit Card, you will not be treated as a defaulter and can use the Credit Card in the future also. If you don’t make even this payment, there will be other charges like late payment fee etc.
What will happen if only the Minimum Amount Due in Credit Card is paid?
If you pay only the minimum amount due, then the unpaid amount is carried forward to the next billing cycle and so on. This is called Revolving Credit. Once you start using this, you are entering into a world of Credit Card debt trap!
Credit Card Interest Rates
When you are paying 10% annual interest on a Home Loan, the annual interest rate on Credit Card will be in the range of 36% to 48% depending on the card. When you are paying only the minimum amount due in Credit Card, you will be charged interest at the above high rate for the remaining balance brought forward in the next month.
Can you make fresh purchases using the Credit Card?
Yes. But you will not get the interest-free credit anymore. For all the new purchases, the bank will charge interest from the date of purchase. This will continue till you clear the total amount due in the card. So, if you are unable to pay the total amount due, it’s better to stop using the Credit Card, till you clear all the total dues.
Will this affect your CIBIL Score?
Yes, when you are using the revolving credit, it is a clear indicator of your weak financial position. This will affect your Credit Score and getting further credit in the future will be an issue like Rahul.
How to escape from the Credit Card debt trap?
Try to make credit card payment in full. If you are not able to make the payment in full, try the following solutions
- Take a loan from your friends, siblings or your parents
- If you have some investments, break it and pay the credit card due as it is the most expensive financial instrument, if you do not pay on time.
- There are many other loans which are available at a lesser rate of interest in the market. You may avail of any such loans and utilize the amount to clear the Credit Card dues.
- Personal Loan interest rate is cheaper than the interest rate on Credit Card. Take a personal loan.
- Try using credit card balance transfer
- Start cutting your expenses and try to pay more
- If nothing works, convert the due amount into EMI option given by credit card companies
Minimum Amount Due in Credit Card – Trap from the banks
If you are paying only the minimum amount due in Credit Card, it is high time to understand the lurking danger behind this. Most banks do not inform their clients of the dangers of paying the “minimum amount due in Credit Card“. This is where the card issuing banks make lot of money.