What Happens if You Only Pay the Minimum Amount on Your Credit Card?

minimum amount due

minimum amount due

While using a credit card, you are able to spend money that you do not have, yet. While this is a great opportunity in itself, it is also a great responsibility.

This is an instrument that, if used wisely, can not only leave you with an enviable credit history but can also teach you immense fiscal discipline. Also, a good credit card limit expands your horizon well beyond your average limits. This does not happen when you choose the minimum amount due option.

You earn to spend, as well as to save and invest.

Combining the two, almost parallel, objectives with unforeseen exigencies, such as sudden medical expenses or even an unfortunate lay-off from work, will be the sum total of your fiscal objective.

Hence, there is always a possibility of the need for a bit of belt-tightening. 

Such perfection, however, is not available in life. One day, you might lose your only revenue source. One day, you may be forced to run up such a huge medical bill that you are left floundering. 

That is when you turn to your savings, and you decide to turn down the tap on your credit card payments.

You decide to pay just the minimum amount due. You can easily understand that just a few such instances within your long association with a credit card company such as Bajaj Finserv RBL Bank SuperCard, the best card on the market, will not affect your credit history negatively. In fact, these checks and balances are built into every organization that wants to analyze your creditworthiness. 

What happens, however, if you make paying the minimum amount due a habit? That is when the very purpose of you choosing a credit card as a mode of payment is defeated. That is when your credit card limit – the extent to which you can spend – becomes worthless.

These happen mostly when you disregard the strength of your current revenue stream and decide on a lot of impulse purchases.

If you are generally on a tight budget, these will eat into your regular expenses and create for you a debt that you will have trouble paying off. The interest on loans (credit card) that you had been avoiding so assiduously, suddenly piles up.

Possibly the only advantage of paying only the minimum amount due is to keep your credit card active and to keep the card account operative.

The other benefit will be in your credit card company (or the issuing bank) not reporting you as irregular to the credit bureau if you make minimum amount due payments on time. 

This is irrespective of your credit card limit. However, this cannot last forever. Sooner or later, you will have to pay back, and also, you will not be able to use the credit card as you could.

For most credit card companies, the minimum amount due is generally 5% of the balance outstanding as calculated on the date of the statement.

However, if you did convert your purchases to EMI or if you have enabled the EMI balance transfer option – this is one low-interest option available with Bajaj Finserv RBL Bank SuperCard – then that too will be added to your minimum amount due. This is not including any minimum amount due from any previous cycle. 

Say, you have made a purchase of Rs 10,000 in the middle of a month and your statement date is the beginning of the next month, while you are supposed to pay up by the end of the month in which you made the purchase.

That is the cycle. For the Rs 10,000 purchase, you will get a 45-day interest-free window to pay back the amount in full by the end of the month.

In the absence of payment by the end of the month, you will receive a statement at the beginning of the next month, showing that Rs 10,000 is due to the company, and also stating that the minimum amount due is a mere Rs 500 (5% of Rs 10,000). You can decide to do one of two things. Pay up in full and get into the next cycle with a blank slate, or pay just Rs 500. 

If you have paid just the minimum amount due, then you will notice that for your next purchase (say Rs 15,000), you have not been offered any interest-free credit period. That is one setback.

In the next statement, you will see that you have been charged Rs 682 on your purchase, plus you have been charged a service tax on the interest (Rs 95). 

Now the total due will be shown as Rs 10,000+15,000+682 = Rs 25,682, minus the Rs 500 you had paid = Rs 25,277, and the minimum amount due will have gone up to (rounded off) Rs 1263 (which is 5% of Rs 25,277). The interest is being calculated at the rate of 3%.

Such is the progression of your debt, and not only have you not been able to pay the principal, but you have also lost the advantage of an interest-free period on purchases (expenses). In case you skip a payment date totally, without any payment, a late payment fee also kicks in.

While you can easily understand the absurdity of this, even with a rather impressive credit card limit, this dilemma will only grow. The best option is to try and avoid the minimum amount due option.