Credit cards are useful for short-term borrowing but come with the highest interest rates in personal finance. Many users believe that paying only the ‘minimum due’ on their bill keeps them financially safe. This, in turn, only leads to the build-up of credit card bills. Here is a simpler explanation of why paying only the minimum is dangerous.
What happens when you pay only minimum due?
The minimum payment is usually about 5% of your total outstanding bill. This is the minimum amount you must pay each month on a credit card.
Interest rates on credit cards are quite high, typically around 36% to 42% per year.
Paying only the minimum due removes penalties, but interest continues to accrue on the unpaid balance.
How does interest grow so quickly?
When you pay only a fraction of your bill, interest starts to accrue every month on the remaining balance. If you pay only 2500 against 50000, interest is charged on 47500.
The next month’s interest is added again, together with any new spending. This increases the debt (the snowball effect). The SBI Cards analysis also indicates that the total interest and charges associated with clearing a ₹50,000 balance may exceed ₹1 lakh after five years or so.
Do you lose the interest-free period?
Yes. If you carry forward any unpaid balance, you lose the interest-free grace period on new purchases, which usually lasts for 45 to 50 days. This means fresh purchases begin to attract interest charges immediately, making the credit card very expensive to use.
Does it affect your credit score?
Yes, it can. While your account won’t be marked as overdue, regularly paying only the minimum suggests financial stress. High outstanding balances also increase your credit utilisation, which can lower your credit score over time.
Repeatedly paying the minimum due could reduce your CIBIL score by 50 to 100 points in the long run.
What should you do instead?
It is best that one pays his credit card bills in full every month, to avoid interest charges and to maintain a healthy credit score. If that is not possible, try to pay much more than the minimum and also clear the balance as soon as you can.
In difficult situations, you could think of converting your balance to an EMI plan with a lower interest rate, or seek a personal loan to repay credit card debt at exorbitant interest rates.
