We are sure everyone who uses a credit card has wondered about this. Using credit cards and understanding their working involves a little math but is no rocket science. Credit cards are a simple form of credit; you use the card to make payments and pay off the amount you have used before your card’s due date. It’s pretty simple, but suppose your finances have hit a rough patch, and you are unable to pay off your credit card bill. What now? For situations like this, the credit card issuers often give you the Minimum Amount Due (MAD) in your billing statement every month. This concept now leads to other big questions that users may have. Do I get charged interest if I pay the minimum amount due every month? What am I being charged interest on? What happens to my CIBIL or my credit score? Here is an explanation of what happens when you make minimum payments for your credit card and if you should pay the minimum amount due or the total amount due.
What is Minimum Amount Due, and How is it Calculated?
The minimum amount due is a small percentage (usually 5%) of the total outstanding balance that a user owes on the date of the billing statement generation. You, as a user, are required to make at least a minimum payment before the due date to avoid paying the late fee or penalties for a missed payment. Any missed payments are negatively reflected in your credit history. Making minimum payments can also save your credit score from being impacted negatively.
Let’s suppose your bill was generated, and your total outstanding balance is ₹20,000. You have been informed that your minimum balance is ₹1,000. Your bill is due in 20 days. You have two options: to either pay off the entire outstanding balance or pay the minimum amount due. If you end up paying the minimum amount due, in this case, ₹1,000, the interest-free period is no longer valid, and you will have to pay interest on the outstanding balance.
By making the minimum due payment, you cannot avoid the high interest, but it is a temporary solution to avoid late fee penalties and avoid that big hit on your credit score. You can definitely go on and make monthly minimum payments on your credit card every month, but we highly discourage the practice. When you make the minimum payment, the majority of that covers the interest, and only a tiny part of it contributes to your outstanding balance. The interest will keep adding on until you settle the dues.
So, what should you do if not make minimum payments on your credit card?
Try controlling your spending habits and spending only what you can pay by your due date to avoid falling into this debt trap. This could include making a budget, sticking to it, and tracking your expenses. Spend whatever you are sure you will be able to pay off in the end. Pay more than just the minimum amount to be able to get out of the debt quickly.
Bottom Line
Paying just the minimum amount due can sound very easy, but there is more to it than what you see on the surface. It attracts interest at a very high rate, deprives you of the interest-free period, and a simple credit card can become a debt trap. Instead, it is suggested that you pay off your cards in full to make sure you are not paying high fees and interest. This practice also makes sure you have a healthy credit score. Save yourself the trouble of falling into this spiral of interest and other penalties by paying the total outstanding balance.