Don't Fall Into The Credit Card Minimum Payment Trap

Credit cards are used for making purchases and managing finances. Paying bills on time helps maintain a good credit history and increases your chances of getting a higher credit limit on your card. Sometimes, the monthly bill can be quite high if you rack up quite a sum, and be a little difficult to repay in one go. While such scenarios should be avoided altogether, you can make a part payment instead of missing the bill altogether. You can repay a minimum amount due on your credit card. 

Understanding credit card minimum payment and the impact it has on your finances is important. If you’ve got 5 minutes to spare, this post can help you out, should you ever find yourself in such a scenario.

What is a credit card minimum payment?

The minimum amount you need to pay each month towards any balance on your credit card is known as a minimum payment. This amount is typically a percentage of your outstanding balance or a fixed rupee amount, whichever is greater.

How is the minimum payment calculated?

The minimum payment is normally determined as a percentage of your outstanding balance, ranging from 1% to 3%. For instance, if the minimum payment is 2% and your credit card amount is Rs. 10,000, your minimum payment would be Rs. 200.

In some cases, the minimum payment may be a fixed amount, such as Rs. 500. If your minimum payment is calculated as a percentage of your balance, the minimum payment amount may vary from month to month as your balance changes.

Why is it important to make at least the minimum payment?

In order to avoid late penalties and penalty charges, making at least the minimum credit card payment is imperative. Late payments can attract a fee of up to Rs. 1,500 and a penalty interest rate of up to 40% per annum. Additionally, missing a payment can negatively impact your credit score.

How long will paying off your balance by making only the minimum payment take?

If you make the minimum payment on your credit card every month, paying off your amount might take a long time and cost you money in interest costs. For instance, it would take more than 15 years to pay off a load of Rs. 50,000 on a credit card with an interest rate of 15% per year and a minimum payment of 2% of the balance, costing you more than Rs. 61,000 in interest.

How can you pay off your credit card balance faster?

Consider paying more than the minimum monthly to pay off your credit card balance faster. Making additional payments over the minimum required will decrease the interest you pay and the time it takes to pay off your balance.

What other factors should you consider when managing your credit card balance?

In addition to credit card minimum payment and paying off your balance as quickly as possible, there are other factors to consider when managing your credit card balance. These include.

• Your credit utilisation ratio: This is the amount of credit you use compared to your total credit limit. Keeping your credit utilisation ratio below 30% can help you maintain a good credit score.
• Your credit card loan interest rate: If you're dealing with a high credit card interest rate, you might want to consider transferring the debt to a card with a lower interest rate.
• Your credit score: Late payments and excessive credit card balances can lower your credit score, making it easier to get future loans, credit cards, or other financial goods.

How can you avoid falling into credit card debt?

To avoid falling into credit card debt, it's important to use your credit card responsibly and within your means. Here are some tips.

• Set a budget: Create a monthly budget and stick to it. Only use your credit card for monthly purchases you can afford to pay off.
• Pay your balance in full: Whenever possible, pay your balance each month to avoid interest charges.
• Monitor your account: Keep track of your credit card transactions and ensure you're spending only what you can afford.

Credit cards are a convenient payment option for many in India, but it's crucial to understand the implications of minimum payments on your financial health. Making the minimum monthly payment at the very least can help avoid late fees and penalty charges. However, paying more than the minimum is important to pay off your balance sooner and decrease interest costs. 

Other factors to consider when managing your credit card balance include credit utilisation ratio, interest rate, and credit score. By using your credit card responsibly, setting a budget, and paying your balance in full whenever possible, you can avoid accumulating credit card debt and stay on top of your finances.