Why paying ‘Minimum Amount Due’ on Credit Card is Wrong?

Do you know What is Minimum Amount Due in Credit Card?

If you are a credit card user and you don’t know that, then chances are that you are in trouble. And if you are one of those who just plan to pay the minimum amount due on credit card bills every month, then you are in bigger trouble!

If you have a high credit card, it can be tempting to pay only the credit card minimum due. But paying less than full bill can save money this month but it costs you a lot more in the long run as will be clear by the end of this article. You will also understand whether paying credit card minimum due is good or bad?

So…

What is Minimum Amount Due in Credit Cards?

Have you seen your credit card bill?

You will see the term ‘Minimum Amount Due’ (also called credit card MAD) in it.

So what is this minimum amount due in credit card bills?

It is a facility provided by credit card companies for the situations where you fall short of funds; credit cards offer you the option of paying only the minimum amount due instead of paying the full bill (total amount due). And this minimum required amount that is to be paid to keep the card account active is what is popularly called as Credit Card Minimum Due. And that is the difference between minimum amount due and total amount due in credit card.

And what exactly is the amount of this minimum credit card due?

Or if you are looking for credit card minimum amount due calculator, then understand that credit card minimum due amount is only a small portion of the principal outstanding every month. And generally in India, the minimum amount due is calculated as 5% of your total credit card outstanding balance.

So if your total amount due in credit card bill is Rs 40,000, then by 5% minimum due rule, your credit card’s Minimum Amount Due is 5% of Rs 40,000, i.e. Rs 2000.

Note – If you have converted some of your transactions/purchases to EMI, then the EMI amount is also added to the minimum amount due for the month’s bill.

That is how the calculation of Minimum Amount Due done for credit cards in India and that is the real meaning of minimum amount due in credit card.

But let’s move on and see why only paying the minimum amount due on your credit card bills is a bad idea.

But before that, let me address an important aspect.

A few years back, I had written why people are wrong to think that credit cards are evil and Why Credit Cards Aren’t Evil? And I am sure you would agree with me that there can be no denying how convenient things can be if you use credit cards smartly. Ofcourse you need to be careful about not using it unnecessarily and ending up in a debt trap (and miss out on living a loan free life).

But to be able to use your credit cards smartly, you need to understand the basic mathematics of credit card interest calculations.

And remember, that credit cards are the costliest forms of credit available to common people. They can charge up to 40% annual rate of interest!

That is not a typo. Credit cards do charge 2.5% to 4% per month. So they really are very costly in terms of interest rates.

So before we answer the question of why paying Minimum Amount Due on Credit Cards is not a good idea, let’s understand the basic maths behind credit card interest calculations.

By the way, if you do pay the minimum due amount, then you avoid late payment penalty and any negative impact on your credit score. But most importantly, you still have to pay interest on the outstanding credit card amount.

Now, let’s take a small example.

Suppose you have a credit card and following are applicable on it:

• Bill generated on 15^th of every month.
• Payment (for the bill) to be made by 5^th of the next month
• Interest at 3.0% per month
• Late fee of Rs 500
• There can be many more things but to keep thing simple, let’s limit it to the above four points only.

If you make a transaction on (let’s say) 16^th December, then it will reflect on the bill generated on 15^th January. And you will have to pay it by 5^th February.

What this means is that you get interest-free period between 16^th December and 5^th February of about 50 days to clear your dues.

But depending on the date of the actual transaction in reference to the fixed billing date, the actual number of interest-free days will vary for each transaction you make.

If you made the transaction on 31^st December, it will reflect in the bill generated on 15^th January. And you will have to pay it by 5^th February. In this case, you get an interest-free period between 31^st December and 5^th February of about 35 days to clear your dues. Or if you made the transaction on 13^th January, it will reflect in the bill generated on 15^th January. And you will have to pay it by 5^th February. So you just get an interest-free period between 13^th January and 5^th February of about 22 days.

So, to emphasize, I repeat that depending on the date of the transaction, in reference to the fixed billing date, the actual number of interest-free days will vary for each transaction made.

But for the sake of simplicity, let’s stick to the example of (31^st December) example for time being.

Now assuming you made Rs 20,000 transaction on 31^st December, you have 3 options:

1. Pay full Rs 20,000 before 5^th February
2. Pay Minimum Amount Due (Rs 1000 in this case)
3. Pay nothing

Here is what happens in each case of the above case:

1. No interest was charged as you paid in full before the due date and there was no outstanding on the due date.
2. Interest charged on Rs 19,000 (Rs 20,000 – Rs 1000)
3. Interest charged on full Rs 20,000 + late fee of Rs 500 applied since even the minimum amount due was not paid.

Now we come back to our original point of why just paying the minimum amount due is foolish. Ideally, you should always try and pay the total amount due in credit cards. It’s a common mistake I see amongst people that they think that just paying the minimum amount due is sufficient. But it’s not. You avoid the late payment penalty by paying the minimum amount due but you are still charged interest on the outstanding amount at a very high rate. And that’s not all. If paying high interest wasn’t enough, you also don’t get interest-free credit period for later transactions.

Let’s extend the above example even further to show more problems of paying only the minimum amount.

Suppose after paying Rs 1000 (on 4^th February) as the minimum amount due, you again make a transaction of Rs 15,000 on 6^th February.

What happens next?

The next bill which will be generated on 15^th February) will consider all the following for calculating the outstanding amount:

• Rs 19,000 (outstanding from 1^st transaction)
• Interest on Rs 19,000 from 31^st December – 15^th February
• Rs 15,000 (outstanding from 2^nd transaction)
• Interest on Rs 15,000 from 6^th February – 15^th February

Did you notice something?

Once you do not clear your full outstanding amount from the first bill, you don’t get any interest free period for the second transaction. And that is because you had an outstanding from the previous bill. And this is what kills careless credit card users.

So remember that if you only pay the Minimum Amount Due (i.e. you don’t make the full payment), then you will not get any interest free credit period.

For obvious reasons of maximizing their income (via interest from credit card users), the credit card companies are more than happy if you don’t pay the full outstanding balance every month on your credit card. But obviously, it’s in your interest to try and pay your credit card dues in full every month.

So…

What are the Disadvantages of Paying only the Minimum Amount Due?

• If you keep making regular, full payments of your credit card total amount dues, then you keep getting interest free credit period for up to 50+ days as you have seen in the above examples. But if you don’t, then you do not get any interest free credit period for transactions made after the due date.
• Every month, the interest charged on outstanding dues will become part of the principal of next month and again increase the interest amount. And this will continue.
• The interest amount will keep accumulating until you settle the total dues. So, even if you have paid the Minimum Amount Due and have avoided paying any penalty for late payment, you still end up paying a lot of interest till the time you clear your credit card dues in full.

Many people ask the following question:

What happens if you keep paying just the Minimum Amount Due on your credit card bills every month?

Many people ask this question.

But if you think that paying just the ‘minimum amount due’ on credit card bills every month will help you completely clear off your credit card bills within a few months, then you are wrong! That won’t happen.

To illustrate this, let’s say that you have a total amount due of Rs 10,000. Now Minimum Amount Due of 5% will be Rs 500 only. So even if there was no interest levied, it will take you 20 months to clear the full Rs 10,000. But credit card companies aren’t saints and hence, interest is levied. So until you re-pay the outstanding balance completely, the interest will keep getting levied on the outstanding balance every day. And it will take you much longer to clear the full dues. This is because of the revolving credit facility provided to you on your credit card.

Remember one thing – Any payment you make and which is less than the total amount due, it will attract interest rate on revolving credit. And as a result, paying only the minimum amount due every month will result in you taking several years for making complete repayment of the outstanding amount.

It is therefore strongly advised to try and always repay full credit card dues within the credit-free period available.

So that was the answer to your questions like ‘What happens if I only pay minimum payment on my credit card?’

And to ensure that there is no confusion, and to answer another important question that people have – ‘If I pay minimum credit card payment, do I get charged interest?’

The answer is yes you do get charged interest.

There is another benefit of using credit cards (ofcourse simultaneously clearing your full dues every month).

If you are smart and financially disciplined, then judicious spending using your credit cards (and proper timely and full repayment) over a period of time will help create a good credit history. And having a good credit history helps when you go out to take loans like home loans, personal loans, etc.

So if you want to improve your credit score but for some reason, are finding it difficult to get a credit card, you have another option. You can have a credit card without history by going for credit cards against fixed deposits.

How does that work? It’s simple.

You just open a fixed deposit and take a credit card against that fixed deposit. This FD acts as a security for the credit card issuer as if you cannot pay on time, your FD can be liquidated to settle the outstanding credit card debt. But for obvious reasons, you cannot liquidate your bank FD till you have the credit card.

With that, I leave you with some simple yet effective credit card tips:

• Always try to pay your credit card bill in full. Don’t just pay the Minimum Amount Due.
• This also means that spend only what you can repay easily, i.e. using this and the current month’s income. Don’t go overboard with your spending (do read Spend Today Vs Invest for Tomorrow if it interests you)
• Even if you are unable to pay in full and end up paying only the minimum amount due, ensure that this doesn’t happen regularly. Paying just the minimum amount on credit cards is okay if you are doing it for genuine reasons and rarely. Do not make it a habit.
• Remember that you pay a very high rate of interest on credit card dues (30-40%) and even if you pay the minimum due amount, you only avoid late fees but still pay that high interest on the outstanding credit card amount.
• If you have an unmanageable amount of credit card outstanding, you can even consider taking cheaper personal loans to clear off the credit card debt. Since personal loan rates are lower than credit card interest rates, you will save a lot on interest costs.
• If you feel you have an uncontrollable spending problem, then acknowledge that credit card can be a big problem for you. Clear your dues and surrender it. Don’t use it. Plain and simple.

Remember that no matter how convenient credit cards are, the fact is that the credit card debt is the most expensive debt due to its extremely high-interest rates.

Note – If you are interested in picking the right credit card for yourself, then do read How to choose the Best Credit Card in India?

So do not forget that credit card is a convenience and not a source of income.

You should always try to make credit card payments in full. Just paying the Minimum Amount Due is best avoided. And that is the best credit card repayment strategy I can give you.

I hope you got a good idea from this article about what is minimum amount due on credit card and what is the difference between minimum amount due and total amount due. And also it would be clear by now as to why only paying credit card minimum amount due is wrong.