Understanding the Credit Card Minimum Amount Due: What It Is and Why It Matters

The convenience that credit cards bring along with them is unanimously known. They build your credit over time and help you manage your finances in a superior way. A line that speaks “Minimum Amount Due” is always there when you get your credit card statement. You must be tempted to pay just this minimum amount and carry the rest of the balance forward, but this holds a very crucial aspect in managing your finance. It’s really important for everyone to know what this amount represents. So let’s get a deeper understanding about this.

What Is the Credit Card Minimum Amount Due?

There is a small payment that you have to make by credit card’s due date and that amount is known as the minimum amount due. This amount is necessary to pay for showing your account in a good repute. This amount is generally 5% of your total outstanding balance but it can vary slightly depending upon your credit card’s issuer. If you have exceeded your credit limit and/or have any overdue amounts, then that will also get added to your minimum amount due.

How Is the Minimum Amount Due Calculated?

The inclusions of minimum amount due are-

A Percentage of the Outstanding Balance: Generally it is 5% and can change according to the card issuer.

Any EMIs: If you are giving EMIs for any of your purchase, that amount will also be added.

Past Due Amounts: If you have unpaid amounts from previous statements, those will also be included.

Fees and Charges: Any over-limit charges or late payment fees might also get added.

Let us take an example – Suppose your outstanding balance is Rs. 20,000 and the minimum payment percentage applied is 5%. Your minimum amount due will come out to be Rs. 1000. Any additional charges or overdue amounts will also be added if there are any.

Why You Should Avoid Paying Just the Minimum Amount Due

Although paying just the minimum amount due helps your account not to become neglectful and avoid late payment fees, it is not always the best financial strategy. We have listed certain reasons for that-

1. Increase of Interest Charges

When you just pay the minimum amount due, interest rate on the remaining balance continues to increase and that too at a higher rate. Over time this can become problematic for you as it might become more expensive for you to pay off your debt.

2. Prolonged Debt Repayment

The time to pay off your credit card debt increases if you only pay just the minimum. If you consistently pay just the minimum, it can take years to clear your balance because a large chunk of your monthly payment will go towards interest rather than reducing the principal amount.

3. Negative Impact on Credit Score

Credit utilization ratio which represents the ratio of credit you are using in comparison to what you have, should be low. If you have high balances relative to your credit limit, your credit score can be down. If you consistently pay just the minimum, your balances can become high which can have a negative impact on your credit score. This will make it tough and expensive for you to obtain credit in the future.

4. Financial Stress

Financial flexibility hampers and a cycle of debt is created which is difficult to break. This happens if you only pay the minimum amount due and it will by default cause you financial stress. The interest amount you will pay increases as long as the duration of carrying huge balances. This will reduce the funds available for savings or other financial goals.

Conclusion

To avoid penalties, you must pay the minimum amount due which is a small portion of your total balance. But you must not rely on that only. Always try to pay the full balance amount on your credit card each month to get free from what we call as financial demons – high-interest charges, prolonged debt, and a lower credit score. If you are unable to pay the whole amount try paying as much above the minimum due as possible. We recommend this to help maintain your financial health and not to fall in a debt trap. We want you to just enjoy the benefits of credit cards without the burden of excessive debt. You can opt for a new credit card with varied benefits, from us today.