This new credit card rule may cost you more | Here’s why

IDFC First Bank will lower the minimum amount due on its credit cards from 5 per cent to 2 per cent of the principal payable amount payable starting August 1. Previously, Axis Bank had done the same in November 2023. These changes in the minimum amount due may lead to higher interest costs for credit card users, according to a report by Moneycontrol.

Users could end up paying interest of around 3-4 per cent a month on the outstanding balance, which is more than 40 per cent a year, the report said.

For example, if a credit card bill is ₹1 lakh, the minimum amount due would have been ₹5,000 (5%) earlier. Now, it will be ₹2,000 (2%). 

“The credit card user can now avoid late payment charges and reduce the impact on his or her credit score by just paying ₹2,000 instead of ₹5,000,” said Parijat Garg, a digital lending consultant, as quoted in the report. 

However, Garg added that users will now have to pay interest on the outstanding balance of ₹98,000 instead of ₹95,000 earlier.

Minimum amount due

The minimum amount due refers to the absolute minimum amount that needs to be repaid against the monthly credit card outstanding amount to maintain good standing and avoid late payment fees. This is a percentage of the total amount due for a specific statement or billing period.

“An important point to note is if you have an unpaid amount left over from your previous bill, you don’t get any interest-free period for your transactions thereafter. You will be charged interest from the date of the transaction itself,” the report quoted Dev Ashish, founder of StableInvestor.com, a personal finance advisory.

Banks are reducing the minimum amount

Reducing the minimum due amount enables the customer to pay more regularly rather than default, which is beneficial to the banks. “Additionally, the customer who rolls over the balance ends up paying interest on the outstanding amount—this effectively means higher potential revenue for the bank,” the report said, citing Garg. 

Hence, decreasing the minimum amount due is an advantage for the bank.

Credit Card Debt Trap

Paying only the minimum amount due may lead to a well-known credit card debt trap. “Customers should ignore this reduced minimum amount due and continue to pay their total bill as before,” the report said, quoting Sumanta Mandal, founder of TechnoFino, a debit and credit cards reviewing platform.

The report also refers to calculations by Axis Bank, according to which for a credit card expense of ₹5,000 and paying back only the minimum amount due every month (subject to a minimum of ₹100), it will most likely take roughly seven years to pay back the total amount. 

Hence, paying just the minimum amount due, or anything less than the full outstanding, can become expensive for a credit card user.

The report added, quoting Mandal, that a credit card user should ideally pay back the entire outstanding balance or substantially more than the minimum amount due.