Why Paying Only the Minimum Amount Due on Your Credit Card Isn't a Smart Idea? - MoneyTap Blog
MoneyTap Blog
Paying Only the Minimum Amount Due on Your Credit Card Isn’t a Smart Idea
Home » Why Paying Only the Minimum Amount Due on Your Credit Card Isn’t a Smart Idea?

Why Paying Only the Minimum Amount Due on Your Credit Card Isn’t a Smart Idea?

When you receive your credit card statement at the end of your billing cycle, two figures are very prominent. One is the total outstanding, and the other is the minimum amount due. Ideally, you should pay off the total outstanding, but for people who find it difficult to pay off their credit cards every month, the credit card providers expect them to pay at least the minimum amount due to keep their account active.

So, let’s get into the details of what this minimum amount due on credit card is and whether it helps or harms you.

What is the minimum amount due on credit cards?

The minimum amount due on your credit card is the minimum amount you need to pay on or before the due date. It is a small portion of the outstanding every month.

The minimum amount due is usually 5% of the total outstanding balance on your credit card but can be higher if

  • You bought something on EMI using your credit card
  • You spent more than your credit limit
  • You haven’t cleared off your previous month’s dues as the unpaid amount is added to the current minimum due amount

How to calculate the minimum amount due on credit card?

Most credit card companies set 5% of the total outstanding balance (calculated on the date of statement generation) as the minimum amount due.

Let’s take an example:

Assume that your credit card statement is generated on the 5th of every month. And your payment due is onthe 26th of the next month

Assuming that the minimum amount due is 5% of the outstanding balance and the APR is 3% pm, let’s calculate the minimum due on your credit card.

Transaction Date Type of Transaction Amount of Transaction Remarks
April 20 Purchase ₹ 10,000 Interest-free period
May 5 Statement Generated ₹ 10,000 Payment due date is May 26. Minimum amount due is ₹ 500
May 22 Payment ₹ 500 Paid minimum amount due on credit card
May 27 Purchase ₹ 15,000 Not an interest-free period
June 5 Interest ₹ 682 On the purchases
June 5 Statement generated ₹ 25,182 Due date June 26, the minimum amount due is ₹1259.1

Note: If the minimum amount is not paid before the due date, it will be added to the next month’s minimum amount due along with the late payment fee.

What are the advantages of paying just the minimum amount due?

Paying only the minimum amount has the following benefits:

  • Helps you avoid paying a late payment fee
  • Allows you to manage your finances better, especially when you have a financial crisis
  • Keeps your account active, without the credit card companies reporting it as irregular.
  • Doesn’t affect your credit score

If the advantages are so many, then why do most financial experts insist on paying the total outstanding instead of the minimum due?

Let’s discuss this now.

Why paying just the minimum due on credit card isn’t a good idea?

If you think that paying only the minimum due every month will help clear your credit card debt, then you are on the wrong path.

The reality is that making minimum due payments will reduce the outstanding for the current month. But if you keep making minimum payments, your debt is far from getting paid off.

Even if you decide that you won’t make any more purchases until you repay the outstanding, but if you are only making minimum due payments, your debt will not reduce. Instead, it will increase. This is because the credit card is a revolving line of credit. Interest is applied to your outstanding balance every day. If not managed well, you can easily and unknowingly get into a debt trap.

Let’s take another example, to understand how paying only the minimum amount on credit card increases your outstanding balance.

Assume this.

  • Your credit card statement is generated on the 20th of each month.
  • Your payment due date is on the 5th of the next month.
  • The minimum amount due is 5% of your total outstanding.
  • The APR is 3% pm.
Date of Transaction Type of Spending Amount Spent
20 June Total outstanding ₹ 20,000
5 July Paid minimum amount due ₹ 1000
5 July Total outstanding balance ₹ 19,000
10 July Purchase ₹ 2000
15 July Purchase ₹ 15,000
20 July Total outstanding ₹ 36,380

*Excluding GST

Check the outstanding amount. When you add the total purchase amount of ₹17,000 to the outstanding amount of ₹19,000, the total should have been ₹36,000 and not ₹36,380 for the billing cycle. The extra amount is the interest being charged on the outstanding.

When you repeatedly not pay the total outstanding, the balance and new purchases get added up, and the interest is charged on the new outstanding. In other words, if you continue to pay only the minimum amount due, you lose the privilege of an interest-free period.
This is what happened in the above example.

Credit cards offer excellent rewards and benefits, and they are the best financial tools for quick access to funds, but only if it is used responsibly. RBL Bank offers different types of credit cards, each offering rewards and benefits that are designed to meet your unique requirements. Enjoy the benefits of RBL Bank credit card at an interest rate much lower than most credit cards. Apply for an RBL Bank credit card now!

Shiv Nanda

Shiv Nanda

Shiv Nanda is a financial analyst at MoneyTap who loves to write on various financial topics online. He also advises people on financial planning, investment choices and budgeting skills, and helps them make their financial lives better.

Add comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.