What does the minimum amount due on a credit card mean?

04 OCTOBER, 2021

Credit cards have been gaining tremendous popularity among borrowers in India. Much of its popularity stems from the fact that it offers the best way to manage your finances in times of cash crunch. Depending on your income and credit score,it comes with a predefined credit limit that you can use to purchase goods and services.

However, there is a catch here. Credit cards are the perfect way to manage your money, provided you utilize it wisely. You do not have to pay interest if you make on-time repayments of your credit card bills. But, if you delay credit card payment in full you will have to incur higher interest charges and other penalties. If you wish to avoid such charges and penalties,you will need to pay the minimum amount due on your credit card.

What is the minimum amount due in credit card?;

At times, you are just out of cash and find it difficult to repay your credit card bills in full. In such cases, your issuing bank allows you to pay a fixed sum of money known as the credit card minimum due at the end of the month to prevent high-interest charges and harm to your credit score.

So, how does a credit card minimum due work?

The minimum amount due on your credit card is the smallest amount that you are allowed to pay towards your credit card balance every month. Instead of paying your credit card bills in full, you can choose to pay the minimum amount to avoid high charges and penalties.It is worth noting that your issuing bank may increase your interest charges if you delay your payments.

The credit card minimum due is the minimum payment amount calculated based on a percentage of the outstanding balance. Your issuing bank can also charge a fixed sum of money to pay against your credit card balance every month. Keep in mind that if your credit card balance is below the assigned minimum payment requirement, you will have to pay your online credit card balance in full.

Before applying for an online credit card, it is imperative to understand your issuing bank’s minimum payment policy, as it differs from bank to bank.

The perks of paying the minimum amount due on a credit card

There are several benefits associated with paying the minimum amount due on a credit card, which are:

• It allows you to keep your credit card active and use the total credit limit available. 
• You can protect your credit score from declining. If you make your minimum payment on time, your bank will not classify your payment as a default payment in the credit record. 
• You will not have to incur late payment fees. 
• It enables you to manage your finances well during a financial crisis. 

Risks associated with credit card minimum payment

The benefit of making the credit card minimum payment is that you can keep your credit account in good standing. However, it will not reduce your credit debt. Paying the minimum amount due on your credit card may help you tide over a financial crisis. But, if you make it a habit, your debt will become a burden.

Here is what happens if you continue to make only the credit card minimum payment:

• It will take forever to clear your debt

Your issuing bank will get the minimum credit card payment required at the rock button level. It means that you will either have to pay a percentage of your credit card balance or a fixed amount, which is greater. It allows you to avoid late fees, but you will have to understand that it will take longer than usual to clear your debt.

It would be wise to check your credit card minimum due warning on your online credit card before applying for one. It shows the minimum amount with the years you need to pay off your credit card balance if you only make the minimum payment every month.

• Higher interest charges

The downside of paying the minimum amount due is that your interest charges will likely increase with your balances. You will find it challenging to clear off last month’s interest unless you have a 0% APR. If you continue to make the minimum due payment, you will fall behind in your credit card bill payments. Failing to pay your credit card bills will harm your credit score and significantly increase your interest charges.

• Harm your credit score 

The more purchases you make with your credit card, the higher your credit card balances will be, and a higher balance means a higher credit utilization ratio. Having a higher credit utilization ratio can harm your credit score. With a lower credit score, you will struggle to negotiate better credit card terms.

In short

As a credit cardholder, it is imperative to know that paying the minimum amount is essential to avoid late payment fees, penalty APR charges, and hurting your credit score. It would be wise to pay your credit card bills on time and in full to maintain your credit utilization ratio below 30%. This way, you can significantly save money on interest.