Pros And Cons Of Paying Only Minimum Due On A Credit Card

The minimum balance is a portion of the bill that needs to be repaid before the due date to prevent the account from going into default and to avoid late payment penalties.

A credit card gives you incredible flexibility in managing your finances. You can plan your spends, extend when you need it, and reap rewards and benefits on your spends. However, this comes at a cost: you will need to maintain good financial discipline and repay your bills every month in full and on time. Then your credit card is just like another debit card, albeit one with more offers and discounts. However, if you overextend yourself, repayments could become a problem, and if you default on your payments, you may have to pay interest and penalties on the outstanding amount. Your credit score may also take a hit. 

However, given that the main USP of the credit card is to help users plan and manage their payments, there’s a way out if you have a credit card bill bigger than what you can pay right now. That’s by paying the minimum due. Does it work? Should you do it? Read on to know. 

What’s Minimum Balance?

The minimum balance is a portion of the bill that needs to be repaid before the due date to prevent the account from going into default and to avoid late payment penalties. Every credit card bill specifies the total amount of dues outstanding by the customer, as well as the minimum amount that needs to be paid by the due date. This minimum amount is usually about 5 per cent or 10 per cent of the total bill and, hence, looks like a feasible payment. 

Pros Of Paying Only Minimum Due

If you're facing temporary cash flow issues, paying only the minimum due allows you a certain liquidity while keeping your account active. Paying the minimum due ensures that your payment is not considered late, helping you avoid late fees and protecting your credit score from negative impacts. It also ensures that your card remains operational, avoiding restrictions or potential cancellation by the issuer. This lets you retain access to your available credit limit, which can be helpful in emergencies.

Cons Of Paying Only Minimum Due

Paying the minimum balance is only a stop-gap measure. It will only absolve the late payment fees and not the interest amount on the outstanding amount. Further, any unpaid amount (difference between the total bill amount and minimum payment amount) will not enjoy a credit period and will start attracting interest from the date of purchase until the date of final settlement.

Alternatives To Paying Minimum Due

Paying just the minimum due is a tool that allows you to revolve your credit. However, it can be very expensive. An average credit card has an APR of 36-48 per cent. Assume you have a credit card that charges you an APR of 40 per cent. Your minimum payment due is 10 per cent of outstanding or Rs 2000, whichever is higher. Say you spent Rs 1 lakh on the tenth of the month. If you pay only the minimum due, then you pay Rs 10,000 and have an outstanding of Rs 90,000. If you make no further purchases using the credit card and pay only the minimum due each month, then it would take you 34 months to clear your outstanding. You would have paid approximately Rs 1.37 lakh over this period. 

This makes revolving your credit only paying the minimum due quite expensive. For one, it will take a long time to pay it off. Second, any purchase you make using the card will accrue interest right from day one. One option you can make use of in this situation is to convert your outstanding into an EMI. This will bring down your interest from 40 per cent to around 20 per cent and give you a proper repayment plan to work towards. Even if you cannot convert it into an EMI, make sure you have a proper repayment plan in place as merely paying the minimum due will not help you close the outstanding fast enough. 

A credit card can be very useful but only if you use it right. When the credit card expenses are higher and more frequent, you will end up paying a much higher interest. Therefore, just paying the minimum amount on your credit card bills can not only be expensive, but it can also trap you in debt and ruin you financially in the long run.  So be careful and use your credit card smartly.

(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)