There comes a time when you spend more than you need to just because you have a credit card with a high credit limit. But, when the bill for a credit card comes, it may be a little tough to repay the sum of the amount. For your ease, banks provide a choice of the minimum amount due in credit card. It implies that you can give only a part of your outstanding balance instead of paying the entire pending bill at once. The primary reason behind it is to stop the penalty charge accumulation on the due amount.
How is the minimum amount due on a credit card calculated?
Generally, the credit card’s minimum amount due is about 5% of the entire pending amount of a particular month. Nevertheless, if you have a credit card EMI, you have to include that amount as well in your whole outstanding amount. In such cases, the total minimum due amount can be a little higher. To understand how banks evaluate the minimum due amount on your credit card, let’s take an example.
Suppose your card-providing company generates the statement on the 18th of each month, and the due date of payment is the 6th of the upcoming month.
Presume that finance charges are about four per cent monthly. However, there will be no interest if the transactions are done on the 19th and 5th of March.
The first transaction was done on the 18th of March. Suppose the transaction amount is Rs. 2,000, the due will be Rs. 100, i.e., 5 percent of Rs. 2,000. Hence Rs. 100 will be considered the minimum amount due.
However, if you make a payment of the minimum amount before the 18th of April, the rest amount will incur interest, i.e., Rs. 1,900.
Any other transaction before the 18th of this month will also add to the pending amount. Although you have paid the minimum amount due, the outstanding amount will incur interest, which will be charged according to the percentage of finance charges.
Interest amount of the previous month’s pending balance = Rs. 76 (Rs. 1,900 x 4%)
Interest of current month’s pending balance = Rs. 40 (Rs. 1,000 x 4%)
Total Outstanding balance as on April 18, 2022, = Rs. 3,016 (Rs. 1,900 + Rs. 1,000 + Rs. 76 + Rs. 40)
However, despite having such benefits, it is still suggested that you should pay the whole outstanding balance at once. But why?
Consequences of paying the minimum amount due for credit cards
Paying the minimum amount due in credit card debt seems excellent and comfortable. Instead of paying the outstanding amount, repay this nominal amount to avoid penalties. But this is not the ideal way to approach this; here is why –
- Opting for this will only increase your total due amount
- The debt will keep increasing, leading to a debt trap
- As a result, it will lower your credit card credit score and destroy your credit profile
What can occur if I do not make any payment before the due date?
For some time, if you do not pay your payments and do not lessen your debts, it will lead to serious debt problems. Moreover, you will have to pay more than you would if you had to make your payments on time. Also, the bank will not stay away if you cannot make your payments on time. What they can do is:
- Impose interests, late payment charges, or other charges.
- May suspend your credit card if you fail to make payments on time.
- Badly influence your prospect’s financial plans and provide you a negative score at CIBIL.
Also Read: How to check credit card statements?
In this modern era, everyone enjoys the services of a credit card. But, being aware of your credit card requirements will help you to avoid facing any financial issues. Moreover, the awareness of how the credit card minimum due works and its consequences will also help you steer clear of it and make better financial decisions.
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