According to the Reserve Bank of India (RBI), the number of total outstanding credit cards at the end of December 2018 was about 44.2 million and transactions worth ₹546.35 billion were conducted through them just in that month. Credit card usage in India is steadily increasing, thanks to interest- free credit of about 45 days, ease of doing transactions, discounts and cash back offers, and the digital push by the government. However, credit card spending comes with the risk of overspending.
If you fall short of funds, credit cards offer you the option of paying only the minimum amount due, which is much lower than the total bill. However, paying up only the minimum amount due consistently can land you in a debt trap.
Minimum amount due
As the name suggests, it is the minimum amount you are required to pay on or before the payment due date to maintain your card account. It is only a small portion of the principal outstanding every month.
Typically, the minimum amount due is calculated as 5% of your outstanding balance. However, it can be higher if you bought something on EMI through credit card, or spent more than the credit limit, or have previous month’s dues and so on. Any unpaid minimum amount due from previous bills also get added to your current minimum due amount.
Paying up the minimum amount due can help you avoid paying late payment fee, which is usually a flat fee between ₹100 and ₹1,000, depending on the amount and your card provider, but interest on the outstanding bill amount will not be waived off.
If you don’t pay the minimum: If you don’t pay up the minimum amount due, additional late payment fees, interest and other charges may be levied. There is also a possibility of suspension of your card once the dues cross the credit limit allowed on your card. Besides, not paying even the minimum amount due can severely affect your creditworthiness and credit score, which in turn will make it tough for you to get a loan in future.
If you only pay the minimum: At the end of the month in which you have overspent, the minimum amount due can relieve you as it is usually much lower than the total dues. However, if you get into the habit of paying up only the minimum amount due, the total bill will multiply quickly.
While most credit cards charge a monthly interest rate of 3% on the outstanding amount, the annual interest rate works out to more than 40%. The bank will keep levying interest on any outstanding left after settling the minimum amount. It may take several months for you to finally settle the bill. For instance, according to an example given on State Bank of India’s website, if your outstanding bill is of ₹5,000, and you pay just the minimum amount due every month (subject to a minimum of ₹200 per month), it will take up to 44 months for the entire outstanding amount to be paid in full. This is assuming that no more spends are done on this card.
Paying just the minimum amount is okay if you are doing it for a genuine reason and only rarely, but never make it a practice. Ideally, you should not use more than 50% of your credit limit in a month as using more than that can adversely impact your credit score.