Amount due

Why paying the minimum amount owed on credit cards can put you in the debt trap

If you think that paying the “minimum amount owed” on your credit card bill each month will help you completely offset your credit card bill in a matter of months, then you’re on the wrong track.

Paying the “minimum amount due” to your credit card will reduce the outstanding balance for the current month, but repeating the minimum amount due will not reduce your debt (outstanding amount).

Also, even if you have decided not to use your credit card (which is charged with overdue amount) until you pay off the full invoice amount, your debt will not go down instead, it will continue to grow. to augment. This is due to the revolving credit facility provided to you on your credit card.

In the case of revolving credit, by paying the minimum monthly amount owed, which is typically around 5 percent of the total invoice amount, you can repay the amount owed over a period of time to the issuer. There is no set number of refunds, you can refund any amount at any time until you have paid the full amount of your outstanding bill. However, you should be aware that until you fully pay off the outstanding balance, interest will be charged on the outstanding balance each day. However, this is reflected in your bill / credit card statement on a monthly basis only.

Therefore, in some cases, people who do not manage their credit card debt well find themselves in the debt trap.

Rajanish Prabhu, Credit Cards Business Manager at Yes Bank, said credit card holders can make any payment between “minimum amount due” and “total amount due” as per their monthly credit card statement / bill. .

He said: “Any payment less than the total amount due (the entire unpaid invoice) results in an interest rate on the revolving credit and paying only the minimum amount due can take several months / years to make the full repayment. of the unpaid amount. It is therefore advisable to reimburse the full credit card contributions during the period with no available credit and avoid paying only the minimum amount owed ”.

A no credit period normally ranges from 20 to 50 days during which the lender who issued the credit card charges you no interest. Therefore, you should check the credit-free period available on your credit card before removing it from the issuer, as a longer credit-free period can help with cash shortages.

For example, when you are running out of money and you simply cannot pay off your credit card bill in any given month, a longer credit-free period can help your finances during tough times. Although you don’t get a long period of time, this small amount of time can help you get funds to pay off your credit card bill without paying interest.

Read also :
How is interest on credit cards due

How much interest could be charged?

Since credit card interest rates are high, repeatedly paying only the minimum amount owed will keep you in debt for a long time.

Navin Chandani, CBO, BankBazaar.com said: “Depending on the type of credit card you have, you may be charged 3-4% per month on your credit card bill which remains unpaid at the end of the period. without credit. Once annualized, this interest rate can represent 30 to 50% per year. Add in the value of late payment penalties, and your total expense could be up to 50-60% per year.

This makes credit card debt one of the most expensive debt in the market, so you should use your credit card with care.

How you can fall into a debt trap

Chandani explains further, let’s say you made a purchase of Rs 10,000 on your credit card. You receive your card statement or your invoice indicating your minimum contributions at Rs 500, or 5% of the total contributions. If you pay this amount, you will not be charged any late fees. However, in most cases, interest will be taken after the end of the non-credit period for the total amount due of Rs 10,000 until payment of the minimum amount due and when paid, the remaining balance of Rs 9. 500 will continue to attract an interest rate of around 3 to 4 percent.

“The terms applied to using credit cards may vary depending on the type of card and its issuer. So be sure to check the terms and conditions specifically related to the credit card you are using,” he said. he declares.

Let’s understand with a basic illustration of a credit card statement

Date of transaction: August 1, 2019

Amount of the transaction: Rs 10,000

Statement date / Billing date: August 5, 2019

Minimum amount due: Rs 500 (5 percent of 10,000)

Total amount due: 10,000

Amount due date: August 25, 2019

Assumed interest rate 3% per month

General formula for calculating interest on credit card: ((The number of days is counted from the date of the transaction carried out x Total outstanding x (Interest rate per month x 12 months)) / 365.

Scenario 1: Total amount due paid by the due date

Total amount due paid: Rs 10,000

Payment date: August 20

Next statement date / Billing date: September 5, 2019

Transaction made between August 5 and September 5: NIL

Calculation

Interest received for 20 days (August 1 to August 20): 197.26 [20*10000*3%*12/365 = 197.26]

The total interest charged in the next statement / invoice = Rs 0

Remark

Interest will not be charged only if full payment of the invoice has been made by the due date, as the system will offset the interest charged and you will not have to pay additional interest charges for this.

Scenario 2: Minimum amount due paid before the due date

Minimum amount due paid: Rs 500

Payment date: August 20

Next statement date: September 5

Transaction made between August 5 and September 5: NIL

Calculation

Interest received for 20 days (August 1 to August 20): 197.26 [20*10000*3%*12/365 = 197.26]

Interest charged for 16 days (from August 21 to September 5, on the balance of 9500 [10000 (Bill amount) – 500 (minimum due amount paid)]): 149.91 [16*9500*3%*12/365 = 149.91]

Total interest charged = 149.91+ 197.26 = 347.17

Remarks

Even if you have paid the minimum amount due before the due date, interest will be charged for the full amount of Rs 10,000 until the first payment. Interest on the balance amount (Rs 9,500) will be charged for the next 16 days until the new statement is generated.

Scenario 3: Minimum amount due paid after the due date

Total payment made: Rs 500

Payment date: August 31

Next statement date: September 5

Transaction made between August 5 and September 5: NIL

Calculation

Interest charged for 31 days (August 1 to August 31) = 305.75 [31*10000*3%*12/365 = 305.75]

Interest charged for 5 days (From September 1 to September 5 on the balance of 9500 [10000 (bill amount) – 500 (minimum due amount paid)]) = 46.84 [5*9500*3%*12/365 = 46.84]

Total interest charged = 46.84 + 305.75 = 352.59

Remarks

Interest will be charged for the full amount (Rs 10,000) until the first payment. Interest on the balance amount (Rs 9,500) will be charged for the next 5 days until the new statement is generated. In addition to the above, late payment fees will also be applied because the “minimum amount due” has not been paid on or before the date of the amount due.

Point to note

Interest will be charged from the date of purchase on your credit card. So even if you have paid the minimum amount due and avoided paying the late payment penalty, you will not benefit from the interest-free credit period for the months to come, whether you have made payment of the minimum amount due before or after the amount due date.

Disclaimer: The actual interest calculation will vary based on your purchase, your rotating behavior, and the applicable interest rate on your credit card.


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