A credit card is one of the most preferred channels to pay for goods and services owing to its predominant feature, “Buy Now, Pay Later”. It lets you buy what you want, pay for the transaction on credit basis and payback monthly. You’re not required to pay off the entire balance but only a fraction of the outstanding balance known as the min. amount due. It's highly recommended that you do not just pay the min. amount due but as much as possible since interest charges are billed on a daily basis. If the cardmember continues making only the minimum payment due, the interest charges keep building month on month, leading to unwanted financial burden.
Let's explore various facets of this popular phrase when it comes to making credit card payments.
What is minimum amount due in Credit Cards?
It is the lowest payment the cardmember is required to pay each month to the bank with regard to the outstanding balance on the card before the due date. If there no balance outstanding on the card as of this date, the cardholder is not required to make a payment since this payment component is ascertained on the balance. By default, customer has to pay the min. amount due, failing to which the bank will penalize by means of a fee. It is also known as minimum charge.
The minimum payment due is a small percentage of the account’s balance, around 5-10% of the total bill, depending on the bank in question. It may sound exciting to make payments of such less value, but it affects your credit in the longer run as residual balance is subject to interest charges every day, thereby increasing the value of the outstanding balance. As a responsible and well informed cardholder, you must ensure timely payments, over and above the min. amount due.
The aim should be to pay off the balance if your budget permits.
Advantages and Disadvantages
Paying just the minimum amount due has its pros and cons. Lets look at some of the ways it affects you, both positively and negatively.
- Since its a small fraction of the outstanding balance, making a low payment ensures little financial burden on your wallet. One can easily pay off this amount and goes soft on the wallet.
- It ensures continuity in relationship with the bank since minimum payments on a monthly basis goes well with the bank and also reported positively to the credit rating agencies.
- It brings down the outstanding value, thereby giving you more available credit for usage.
- Compared to the advantages, the disadvantages are plenty since the interest charges keeps building, month on month.
- Since a large share of the payment is primarily applied towards clearing interest charges in the current bill, making a low payment can mean the actual purchases may remain untouched. This largely applies to situations where interest charges form considerable chunk of billed amount.
- The credit builds over a period of time, eating into the available limit and results in a heap of debt. It may even lead to missing payments or defaulting the debt.
- With regard to the mounting debt, one may have to lookout for options to consolidate debt if you owe money on a couple of cards.
If you’ve read the section above in detail, you will realize that the disadvantages outweigh its counterpart. Therefore, paying the minimum amount due leads unwanted burden and a black mark on one’s financial credibility.
Checkout for easy ways to avail the Credit Card Floating Period in your bill.
Is it Viable to Go for it?
Certainly not. There are plenty of cases where cardmembers have been lured into deep debts resulting in dire consequences such as opting for debt restructuring or settling the outstanding amount with the bank. It not only takes a toll on your mental health, but also hits your credit by hampering the prospects of getting a loan in the future. Therefore, you must firstly spend wisely and use cards only when required. If you’re using it frequently, make sure they are paid off before the billing date to reduce the interest burden.
If you’re new to the world of credit cards, it may take some time to understand the functionality. Spend sufficient time every month to explore the terms and conditions along with validating the statement.
Tips & Suggestions
- When you apply for a credit card, spend time in understanding the fine print. It's paramount to know the rates, fees, penalty and all other factors that you think are important for you start using the card in a seamless manner. Analyze how key terms are likely to affect you in the future during the usage. If you’re not satisfied with the terms of usage, speak to the bank and sort at the earliest.
- Seasoned card users may get swayed away with the experience and fall into the trap of using the card frequently and continuing to make just the min. payment without realizing what is in store during a longer run.
- Most importantly, understand the payment allocation procedure. When you make a payment, it is allocated by the bank on predefined rules. Firstly, a major chunk of the payment is used towards clearing the interest charges followed by applying it to components such as purchases, cash advances, balance transfers and so on. Not all banks follow the same allocation procedure when it comes to allocating the payment evenly to all the outstanding components. A copy of this procedure will be available in the fine print supplied with the card. You can also get these details by calling the customer service.
- If you’re finding it difficult to make a payment during a particular time of the month due to obvious reasons, contact the customer service to see the billing cycle options available for you. The payment due date will be automatically altered on the basis of the billing cycle, pushing it forward as per your convenience. The best time of the month to make credit card payment will be during the first week of a month since most of us would receive salary/wages during this period and we can consider a bigger payment, more than the min. payment due.
- Finally, use wisely and try paying off the balance to the highest extent possible. Seeing those hefty interest charges on the bill can be quite gruesome. After all, it's your hard earned money that goes into paying back to the bank.
- If you’re someone who plans to continue making just the min. payment, choose a card that comes with least percentage of calculating the min. payment.
Bankbazaar.ph can help you in choosing the right credit card with low interest rates and the right one to match your lifestyle needs. It pays off to have a credit card that comes at low interest charges so that when you make your monthly payments, the impact of interest charges remains low. Use the credit card section from the home page to browse through informative and content rich pages which provide all the information you should know about credit cards which helps in comparing products from various banks, thus helping you choose the most suitable one to sync with your needs.