Although a credit card is a highly beneficial financial tool, it can also be dangerous if not used right. For someone using a credit card, it’s imperative to know everything about it in order to gain maximum benefits from it.
Moreover, having incomplete information about a credit card can lead to severe repercussions such as landing in a debt trap. One of the major aspects of a credit card is the credit card minimum payment.
As the name suggests, credit card minimum payment or minimum amount due (MAD), is the minimum amount that one has to pay against their credit card bill, and the payment should be made on or before the credit card due date. It is a small percentage of the total outstanding amount in every billing cycle.
In India, the minimum amount due is generally 5% of the total outstanding amount. The credit cardholder has to pay this amount in order to maintain their credit card account.
What happens if you don’t make the minimum payment?
A failure to pay the credit card minimum payment can result in late payment fees being levied. In addition to that, interest on the outstanding amount and other charges can be levied. You face the risk of suspension of your card if the dues exceed your credit card limit.
Additionally, failing to make the minimum payment can negatively impact your creditworthiness and credit score, resulting in an impaired ability to avail a loan or any other form of credit in the future.
Another consequence of missing your minimum payment is that you will lose the facility of availing any promotional interest rate offers. Furthermore, when you miss a number of minimum payments, your card issuer may raise your credit card’s interest rate.
What happens if you only make the minimum payment?
In case you’ve spent a lot of money using your credit card, paying only the minimum amount due rather than the total outstanding amount can come as a relief. However, you should avoid making a habit of doing that due to several reasons.
As mentioned above, paying just the minimum amount consistently over months attracts a significant interest on the total outstanding amount. It is important to note that even though credit cards generally offer a nominal monthly interest rate, the annual interest rate is quite high. Thus, when you keep missing your credit card minimum payments, the mounting interest keeps increasing your total outstanding amount manifold. This way, you can find yourself in a debt trap wherein it gets difficult to pay off your debt.
Let’s say that your total outstanding amount is Rs. 20,000 for a particular month. If you only pay the minimum amount due (Rs. 1,000), you will take 20 months only to pay the principal amount. The piled-up interest may further take years to clear your debt. The takeaway here is that you should avoid making only the credit card minimum payment, and resort to doing it only in the case of a financial emergency.
What happens if you pay the entire credit card balance?
One of the benefits of making full payment on your credit card bill on a regular basis is that you can enjoy an interest-free credit period for a certain amount of time. Paying your outstanding amount in full before your credit card due date also helps you save a significant amount of money in terms of interest payments. This way, you can avoid some serious financial problems like a debt trap. Another benefit of doing it is that it allows you to build a strong credit score over time, which will eventually offer many advantages.
If you make a habit of paying your credit card bills in full, you will automatically try to keep your credit card balance low. You must keep a low credit utilization ratio across all your credit cards, as it starts a cycle of good credit behavior. While the ideal credit utilization ratio is 30%, you should never cross the 50% threshold of your available credit limit in a billing cycle.