Credit cards have become a way of life for millions across the world. In India, credit cards were first considered a luxury when they were introduced but over time they have become a necessity. This was especially proven during recent events like demonetization and the most recent lockdown. The Government of India has also been promoting the digital economy for many years which has further boosted the use of credit cards and added more cardholders in recent years. Now, transactions with billions are conducted through credit cards in a single month.
Minimum amount due on credit cards
Credit cards offer the cardholders a credit-free period of 45 days. When the credit card statement is generated, there are two types of amounts displayed on the statement. One of such amounts is the total amount due and the other is the minimum amount due that has to be paid by the cardholder. The cardholder has to pay at least one of these amounts to ensure that they continue to enjoy the credit limit for the next credit cycle.
The minimum amount due on credit cards is a small portion of the total amount due. This is the basic amount that has to be paid by the cardholder if he/she is unable to pay the entire credit amount due for that period.
How to calculate the minimum amount due on a credit card?
The minimum amount due on credit cards is 5% of the total amount due. However, there are many factors to be considered while arriving at the minimum amount due for a billing cycle. The minimum amount due consists of the following amounts that have to be cleared by the cardholder.
- 5% of the total outstanding balance for the current credit cycle.
- Any amount converted to EMI is added to the minimum amount due
- Any amount unpaid from the previous billing cycle is also part of the minimum amount due for the current billing cycle.
Advantages of paying the minimum amount due
Credit cards often lead to the cardholder making excess purchases which they may find difficult to pay when the credit card bill is generated. For this purpose, the cardholders have the benefit of paying the minimum amount due. There are a few advantages of paying the minimum amount due for a credit period. Some of such advantages are discussed below.
- The cardholder can continue enjoying the uninterrupted benefit of the credit limit for the next billing cycle by paying the minimum credit amount due.
- The bank will refrain from classifying the cardholder as a defaulter for nonpayment of credit card dues.
- The credit score of the cardholder is not damaged on account of nonpayment of credit card dues
- The cardholder is not charged the late payment fees for nonpayment of credit card dues. These charges approximately range from Rs.100 to Rs.1,000 depending on the amount due and the credit card provider.
Dangers of only paying the minimum amount due
When a cardholder does not pay the credit card dues, they are charged with a penalty interest of 3% to 4% per month. These charges are further subject to the levy of service tax. Also, the credit score of the cardholder is further affected adversely which will have long term repercussions on the cardholder. However, when the cardholder only pays the minimum amount due on the credit card, they eventually land in a debt trap and it becomes quite difficult to come out of it. The dangers of paying only the minimum amount due as against the entire amount are highlighted below.
- The amount due on the credit card will keep multiplying if the cardholder is in the habit of only paying the minimum amount due for each credit cycle.
- The cardholder will be charged interest on the unpaid amount of the dues for the previous credit period.
- Also, the cardholder will be charged interest immediately from the date of purchase if only the minimum amount due is paid for the previous billing cycle.
- The burden of interest and service tax on such interest will further add to the dues of the cardholder.
- Paying the minimum amount due for each credit cycle will effectively negate the availability of a free credit period on account of the charges mentioned above.
- When the cardholder is unable to pay the dues consistently and relies on payment of the minimum amount due to continue availing the benefit of the credit limit for the subsequent credit cycles, it also reflects poorly on the credit score of the cardholder.
Paying the minimum amount due is a benefit that the banks provide to the cardholders. However, this benefit should be utilized by the cardholder only when it is absolutely necessary or in case of emergencies when paying the total outstanding is highly difficult. The added burden of interest eventually leads the cardholder into a huge debt trap.
Frequently Asked Questions
What is the penalty levied on delay in paying credit card dues?
The penalty for delay in paying credit card dues is between Rs.100 to Rs. 1,000 depending on the bank and the amount outstanding.
What is the free credit period allowed to cardholders?
Cardholders get the benefit of a free credit period of 45 days to 50 days depending on the bank
What is the interest charged on the balance unpaid of the total outstanding of the credit card dues?
The interest charged on the balance unpaid out of the total outstanding is 3% to 4% per month which can be over 40%.
Can the credit card be suspended if the cardholder does not make timely payments?
Yes. If the cardholder fails to make timely payments of the total amount due or even the minimum amount due, the bank will suspend the credit card of such cardholder on account of persistent defaults.