According to the Reserve Bank of India (RBI), the total number of credit cards in circulation at the end of December 2018 was around 44.2 million and transactions amounted to ??$ 546.35 billion was driven through them just that month. Credit card usage in India is growing steadily, thanks to around 45 days interest-free credit, ease of transactions, discounts and money back offers, and the government’s digital push. However, there is a risk of overdrafting with credit card spending.
If you run out of funds, credit cards give you the option of paying only the minimum amount owed, which is far less than the total bill. However, paying only the minimum amount owed consistently can lead you into a debt trap.
Minimum amount due
As the name suggests, this is the minimum amount you must pay on or before the payment due date to maintain your card account. It is only a small portion of the outstanding principal each month.
Typically, the minimum amount owed is calculated as 5% of your outstanding balance. However, it can be higher if you bought something from EMI by credit card, or if you spent more than the credit limit, or if you have contributions from the previous month, etc. Any unpaid minimum amount due from previous invoices is also added to your current minimum amount due.
Paying the minimum amount owed can help you avoid paying late fees, which are usually a fixed fee between ??100 and ??1,000, depending on the amount and your card provider, but interest on the unpaid invoice amount will not be waived.
If you don’t pay the minimum: If you do not pay the minimum amount due, additional late fees, interest and other charges may be levied. There is also the possibility of suspending your card once contributions exceed the authorized credit limit on your card. Also, not paying even the minimum amount owed can seriously affect your creditworthiness and credit score, which will make it difficult for you to get a loan in the future.
If you only pay the minimum: At the end of the month in which you overspend, the minimum amount owed may be a relief as it is usually much lower than the total contributions. However, if you get into the habit of paying only the minimum amount owed, the total bill will multiply quickly.
While most credit cards charge a monthly interest rate of 3% on the unpaid amount, the annual interest rate is over 40%. The bank will continue to charge interest on any remaining balance after paying the minimum amount. It may take several months for you to finally pay the bill. For example, according to an example given on the website of the State Bank of India, if your unpaid bill is ??5,000, and you only pay the minimum amount due each month (subject to a minimum of ??200 per month), it will take up to 44 months for the full amount outstanding to be paid in full. This assumes that no other expenditure is made on this card.
Paying just the minimum amount is okay if you do it for a real reason and rarely, but never make it a practice. Ideally, you shouldn’t use more than 50% of your credit limit in a month, as using more can negatively impact your credit score.
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