What is the minimum amount due on a credit card and why you should avoid paying only that

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Credit cards offer convenience and flexibility, but managing them wisely is crucial to avoid financial pitfalls. One of the most important aspects of credit card management is understanding the minimum amount due—a term you’ve likely seen on your monthly statement. While it might seem like an easy way to keep your credit card account in good standing, relying solely on paying the minimum due can have significant financial consequences.

In this blog, we’ll break down what the minimum amount due is, how it’s calculated, and its impact on your finances.

What is the minimum amount due?

The minimum amount due is the smallest payment you must make on your credit card balance each month to avoid late fees and maintain your account in good standing. It is not the total outstanding balance but a fraction of it, designed to keep you from defaulting on your credit obligations.

Paying the minimum ensures you meet the basic requirements set by the credit card issuer. However, any unpaid portion of the balance will carry forward to the next billing cycle, accruing interest.

How is the minimum amount due calculated?

Credit card issuers typically calculate the minimum amount due as a percentage of your total outstanding balance, plus any fees or interest accrued. Here’s a breakdown of how it is generally calculated:

Percentage of balance: Usually between 2% and 5% of your total balance. For example, if your outstanding balance is ₹50,000 and your issuer charges 3%, your minimum due will be ₹1,500.

Interest and fees: If you’ve missed payments or incurred fees (e.g., late fees, over-limit fees), these are added to your minimum due.

EMI on purchases: If you’ve converted any purchases into equated monthly instalments (EMIs), the instalment amount will also be included in the minimum due.

Why paying only the minimum amount due can be risky

While it’s tempting to pay the minimum and free up cash for other expenses, this practice can lead to long-term financial strain. Here’s why:

High-interest costs: Credit cards often carry high annual interest rates (APR), ranging from 30% to 40% in India. If you pay only the minimum due, the remaining balance accrues interest, compounding your debt.

Prolonged repayment period: Making only minimum payments extends the time it takes to clear your debt. What starts as a manageable balance can grow into a financial burden.

Reduced credit limit: As your outstanding balance grows, the available credit on your card decreases, limiting your financial flexibility.

Impact on credit score: While paying the minimum due keeps your account current, a high credit utilization ratio (the percentage of your available credit you’re using) can negatively impact your credit score.

When should you pay the minimum amount due?

Paying only the minimum amount due is not ideal for long-term financial health but can be useful in specific situations, such as:

Temporary cash crunch: If you’re facing an unexpected financial emergency, paying the minimum ensures you avoid late fees while buying time to arrange funds.

Preserving your credit score: Paying at least the minimum prevents your account from being reported as delinquent, which could harm your credit score.

Tips to manage your credit card payments effectively

Pay in full whenever possible: Clearing your entire outstanding balance every month helps you avoid interest charges and maintain financial discipline.

Budget for your payments: Allocate a portion of your monthly budget to credit card payments to ensure you don’t overspend.

Set up payment reminders: Use reminders or autopay to avoid missing payment due dates.

Track your spending: Monitor your expenses to avoid exceeding your budget or credit limit.

Consider EMIs for big-ticket items: For large purchases, converting them into EMIs can help you manage repayments better without falling into a debt trap.

The minimum amount due on your credit card is a safety net to keep your account current, but it’s not a strategy for managing debt. Paying only the minimum can lead to mounting interest costs and financial stress over time. To stay financially healthy, aim to pay your balance in full each month, or at least pay more than the minimum whenever possible.

Understanding how credit card payments work empowers you to make informed decisions and use your credit card as a tool for convenience, not a source of financial strain.