While credit cards have been since a long time in India, it is only in recent years that their prevalence has surged. Some of the main factors that credit cards are a popular choice, particularly among young professionals, is that consumption patterns are changing and people are becoming more financially aware. Credit cards were once avoided, but they are now quickly becoming a necessary part of our daily lives.
Sometimes it just so happens that we spend a lot on impulse throughout the month, and by the time we get our credit card bill, our cash flow is already tight. We might not always be able to pay the whole sum owed in such circumstances. Any sum that is not paid in full by the end of the month also accrues hefty interest. The “Minimum Amount Due,” or infamously known as MAD, can save us during these trying times.
What is minimum amount due?
You have two payment options when you receive a credit card statement. The first is the total outstanding amount, while the second is the minimum amount due. When you are low on funds, you are more likely to pay the minimal amount.
The minimum amount due on a credit card is the least amount that must be made on or before the payment due date in order to avoid incurring late penalties. The bank makes sure you can make a monthly principle repayment by determining a minimal amount.
Typically, the minimum payment is set at 5% of the total sum owing as determined on the day the credit card statement is produced.
However, there might be some consequences of paying only the minimum amount due on your credit card.
What are the drawbacks of paying only the minimum amount due?
If you regularly pay the minimal amount due without monitoring your spending to income ratio, you will eventually find yourself in credit card debt. Then, in order to pay off your account, you might need to take out a personal loan.
You could not get approved for a loan or receive it at a very high interest rate if your credit score is poor. This could lead you into a vicious debt trap.
Additionally, long-term use of a credit card balance with an unpaid amount might result in interest charges. Additionally, if you continue to make minimal payments, your debt will hardly be reduced, and you will wind up devoting the majority of your monthly income to interest payments.
Furthermore, it will be more difficult to obtain loans in the future if you choose this strategy. Lenders evaluate your repayment history when you ask for a loan, and they’ll see that you struggle to pay your credit card payments which can create difficulties for you.
By paying only the minimum amount due each month, you may keep your credit card active. However, there won’t be interest-free period and you’ll have to pay exorbitant interest rates. It should be kept in mind that you will end up paying more in interest the less you pay toward the balance that is due.
You have the option of only paying the minimum amount required if there is a financial emergency or cash flow difficulty in a specific month. By paying the minimum amount due, you can prevent negative effects on your credit score and late payment fees, but this agreement should only be used temporarily.
Remember that your credit card is ‘credit’ first and a ‘card’ later.
First Published: 13 Dec 2022, 08:04 AM IST