Credit Cards: What is the minimum due amount, and how can you manage it effectively?
Credit cards: Understanding the minimum amount owed on credit cards is crucial for financial management. While paying only the minimum keeps accounts in good standing, it can lead to long-term debt. Careful use and timely payments are essential to avoid falling into financial traps.
It is sometimes overwhelming to read credit card statements especially when it relates to the minimum balance you owe. Let's break it down so you can understand what it is, how it works, and what it can do to your pocket.
What are credit cards?
Banks and other financial institutions issue credit cards, which are very useful financial tools. You're allowed to borrow money against a preapproved limit for convenience. This simply means you go into debt every time you use one. Although they might make payments easier and provide incentives, misusing them can lead to debt piling and financial pressure.
What is the credit card minimum amount due?
The minimum amount due refers to the least payment that a credit card holder has to make by the due date to keep the account in good standing. This amount is usually calculated as a percentage of the total amount owed, ranging between 5% to 10% of the total amount due, including any accrued interest, fees, or new charges, as per HDFC Bank.
Calculating the minimum amount due on credit cards
Your statement lists both the total amount due for the billing cycle and the minimum amount due. The exact percentage does vary based on the kind of credit card you have and the policies of the issuer of your credit card.
For example, if the credit card balance is ₹30,000 and the minimum amount payable is 5% of the total amount payable, then the minimum amount payable would be ₹1,500 that is ₹30,000 x 0.05.
In this case, ₹1,500 would be the minimum amount payable for the billing cycle.
Benefits
Although not a good idea, there are several short-term benefits that come with paying the minimum:
- Avoids late penalties: Paying at least the minimum can keep you away from late penalties which can be very expensive quickly.
- Maintain your credit account: You stay on good terms with your credit card company by making regular minimum payments.
- Maintains your credit rating: It also drags down your credit score because of missing or delayed payments.
Risks
Although paying only the minimum gives you temporary relief, there are several long-term risks that can place your financial security at risk:
- High interest charges: Most of your payment is applied toward interest rather than principal reduction when you only pay the minimum.
- Long-term debt: The payback time is extended if you are only paying the minimum payment, which can keep you in debt for years.
- Bad credit worthiness: High utilisation and continuous debt may harm your credit rating, which will make it even more difficult to obtain future loans.
How to manage the minimum due amount effectively?
- Do not carry balances: Try to pay off the entire balance each month to avoid interest costs.
- Track your expenses: This will help you avoid crossing your credit limit or exceeding your budget.
- Automate payments: Set up reminders or automate payments so you never miss a deadline.
In conclusion, knowing the minimum amount owed on your credit card is important to effective money management. Paying only the minimum will not be a long-term solution, even though it keeps your account in good standing. You can generate money from credit cards without ending up in their trap as long as you are disciplined, you make thoughtful payments, and you do not overspend.
(Note: Using a credit card carries its own set of risks)
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