Sometimes, you spend more on your credit cards than you can afford. When you receive your credit card bill at the end of the billing cycle, you may feel your cash flow stretching already. In such a situation, you get two options: to pay your bill in full or pay only the minimum amount due. If you cannot pay the total bill amount, you can retain your card by paying the credit card minimum due amount. However, that is not the best thing to do consistently.
If you believe that paying the minimum due amount can help you set off the bill in a few months, you are probably on the wrong track. It will reduce the outstanding amount for the current month only. Making only the minimum payment repeatedly will only cause your debt to accumulate. You cannot get rid of your debt by paying the minimum even if you decide not to use your card until you clear the debt. Here, know what happens when you pay only the credit card minimum due amount and why you should not do that.
What is the Credit Card Minimum Due Amount?
As its name suggests, it is the minimum due amount you have to pay before your credit card bill’s due date. It is a small percentage of your outstanding balance that you must pay to retain your credit card. However, it may be higher if you have bought something in installments using your credit card. The minimum amount may also be higher if you spent more than your available credit limit or if you have outstanding dues from previous months as well. Any minimum amount you did not pay on your last bills is added to your current credit card bill due amount.
Paying the minimum amount can avoid late payment charges. However, depending on the outstanding amount and the card provider, you have to pay the interest rate until paid fully.
How is the Minimum Amount Calculated?
The minimum due amount is a percentage of your outstanding balance with most credit cards. If you purchased something on EMIs or transferred your balance from another provider, that amount also adds to your minimum due balance. Any unpaid minimum amount from your previous cycle is also added to the minimum due amount for the current month.
Paying Only the Minimum Amount Increases Interest Outgo
You may save some money by paying only the minimum payment due. However, you have to pay the total amount eventually, and you will only end up paying more than the original balance if you delay its payment. Besides that, paying only the minimum due keeps you indebted for longer. Remember, only a tiny portion of the minimum due applies to your principal balance, and the remainder pays off your fees and interest.
Some credit cards come with 0% APR for a fixed period. You don’t need to pay more than your minimum due during this time. You can use the card without accruing any interest charges for a few months. However, be sure to pay the balance in full before the promotional period ends. Otherwise, you will have to pay interest on any remaining balance.
How Minimum Payments Affect Your Credit Score?
Credit bureaus consider your credit utilization ratio while calculating your credit score. It is the percentage of the available credit limit you use up during a month. Ideally, they want this ratio to be below 30-40%. If you use more than that, it may hurt your credit score and reduce your credibility. If you pay only the minimum due amount, you maintain your high balance for a long even if you stop using your card for further purchases. Therefore, try to pay the maximum due amount you can to reduce your credit utilization ratio and save your credit score.
Risks of Paying Only the Minimum Due Amount
- When you pay only the minimum due amount, the remaining balance is carried forward to your subsequent billing cycles, and you have to pay interest on that amount.
- For each month you make the minimum payment, the balance amount is added to the minimum due for the next month. As a result, the minimum due amount piles up, becoming harder to clear.
- Credit card interest rates are calculated daily on the remaining balance on your credit cards.
- The interest charges start accumulating from your purchase date and not from the end of your billing cycle. Hence, each time you pay the minimum amount, you let interest charges accumulate.
- If you do not repay your amount in full, your credit limit may decrease, and you may not use your card to spend money for your needs.
Everyone runs shorts of funds sometimes. If you are stuck in a financial crunch, you should pay at least the minimum due amount to reduce your debt. However, please don’t make it a habit to make minimum payments only since it will increase your debt and consolidate your credit score.
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