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Paying the ‘minimum amount due’ on your credit card bill every month will help you completely set-off your credit card bill within few months.
Making the ‘minimum amount due’ payment on your credit card will reduce the outstanding balance of the current month but repeatedly making only minimum amount due payment will not lower your debt (outstanding amount).
Credit cards bring financial ease and freedom on spending by postponing ones debts to a later date. They are now widely used across India to make both small and big purchases due to the convenience and security in payments that they come with.
However, when it comes to paying the bills, people choose to act on it differently. Some choose to pay as much of the outstanding amount as possible, while others choose to just pay the minimum amount due on the card. In fact, paying minimum amount due has reportedly become a habit among users as their spending habits change, making the smaller amount payable an easier way out.
This minimum amount due on credit card is usually 5% of the outstanding balance and as the name suggests, the user is required to pay this amount to keep the card active. Paying it also means that your service provider will not charge you a late payment fee. But the habit of paying the minimum amount could land you in a debt trap.
If you are looking to improve you credit score, which will be helpful to get a loan at an attractive rate in the future, a credit card is a good way to start. Also, a credit card is also where you could go wrong.
If you pay an amount larger than the minimum amount due, it will help maintain a good credit utilization ratio. Credit utilization ratio is the amount of balance on credit card when compared to the credit limit. When you only pay the minimum amount due, the gap between your balance due and the credit limit narrows, hurting your credit score. This is because it shows your indiscipline in paying off debts in a timely manner and banks see you as a potential defaulter of loan and will not be willing to take the risk.
Your inability to pay a little more than minimum amount due now could potentially hurt your home loan plans in the future.
Additionally, a better credit score will also mean than the banks will offer you a bigger credit limit that will come handy in times of crisis.
As you keep paying the minimum, your debt piles up and at one point it will overshoot the credit limit. This will not only mean that you will have a bigger mess to clear, but your credit card will become useless. Its functionality will cease to be of any use once you exceed the spending limit. Not to forget the negative credit score. It is always better to act ahead of time by paying off as much of the balance as you can.
The longer you take to pay your dues, the higher the interest amount that will pile up. You may be saving a little by paying the minimum amount due, but you will suffer heavy losses in the long run.
Since credit card interest rates are high, paying only the minimum amount due repeatedly will keep you in debt for a long time.
Depending on the kind of credit card you have, you may be charged anywhere from 3 to 4 % per month on your credit card bill which remains unpaid at the end of the credit free period. Once annualised, this rate of interest may mean 30 to 50 % a year. Add the value of penalties for late payment, and your total outgo could touch 50 to 60 % a year.”
Example: Say you made a purchase of Rs 10,000 on your credit card. You receive your card statement or bill which shows your minimum dues as Rs 500, that is, 5 % of the total dues. If you pay this amount, you’ll not be charged late payment fees. However, in most cases, the interest will be levied after credit free period is over for the total amount due of Rs 10,000 till the minimum due amount is paid and when it is paid, the remaining balance of Rs 9,500 will continue to attract a monthly interest rate of around 3-4 %.
The interest will be levied from the date of purchase on your credit card. So, even if you have paid the minimum amount due and have avoided paying the late payment penalty, you will not get the benefit of interest-free credit period for the coming months, irrespective whether you have made minimum amount due payment before or after the amount due date.
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