Paying only the minimum amount due on your credit card bill each month may seem like an easy option during financial constraints. However, this approach can lead you down a slippery slope of mounting interest costs, ballooning debt and damaged creditworthiness. Read on to find out more.
What is the minimum amount due?
The minimum amount due is the lowest payment you must make on your credit card by the due date each month. The remaining can be carried forward as debt, accruing interest. The minimum amount due provides flexibility to cardholders for months when paying the full bill is difficult. However, paying only the minimum due comes at a big cost.
High interest costs
The interest rate on unpaid credit card balances is very high at upwards of 30% per annum. If you only pay the minimum due, the remaining balance gets charged at this exorbitant rate. This is how card issuers make their profits. Even a small unpaid balance of ₹5,000 can accumulate hundreds in interest if revolved for months by paying only the minimum. This eats into your savings slowly but surely.
Growing debt trap
Paying minimum amounts creates a debt trap since it does not reduce your principal balance. As interest keeps accruing on unpaid amounts monthly, your outstanding due keeps increasing. So next month a larger balance will accumulate even more interest, resulting in a bigger minimum amount due. This cycle perpetuates if unchecked, ballooning your dues with mounting interest. What starts as a small balance can spiral into a big unmanageable debt trap if minimum amounts stretch for too long.
Credit score damage
Using more than 30% of your credit limit and carrying forward balances monthly hurts your credit score. Since minimum payments only cover interest and a tiny portion of balance, your utilization and rollover levels remain high. This signals credit risk and impacts your creditworthiness negatively. With a lower credit score, you may face rejections or higher interest rates for future loans and cards. Poor credit health can haunt you financially for years.
Pay more than minimum due
Paying only the minimum amount should be your last resort for emergencies, not a regular practice. Make it a rule to pay substantially more – at least double or triple the minimum due every month. Set up automated payments for a fixed amount exceeding the minimum due to enforce discipline. Curtail unnecessary card spending and allocate higher cash flows towards card bills. With extra repayments, your balance will decrease faster lowering interest burden.
Use judiciously for emergency needs
Credit cards should be used judiciously for emergency needs and convenience, not for frivolous discretionary expenses. Make card spending integral to your budget with allocated limits, not an open general-purpose borrowing tool. Undisciplined spending is why minimum due payments become unavoidable. Use prudently only for planned needs so it does not derail your finances.
Minimum due provides a respite on your card during temporary cash shortfalls. But using this option regularly only leads to an inescapable debt trap. Make it a rule to pay much more than the minimum due and use cards wisely to leverage their convenience without losing your financial health. Some credit card companies provide options like ‘build your own credit card’ where you can choose a credit limit that works for you. Use the same if you want to avoid the risk of having a higher credit limit.