If you are one of those who can be termed as an impulsive shopper or a reckless spender and have a credit card to go with it, you are at high risk of falling into a debt trap. This does not mean that having access to a Credit Card is negative, but having an urge to keep shopping without knowing the pitfalls of Credit Card expenses can be detrimental to your financial health.
You may have come across the minimum due amount column in your Credit Card bill. The minimum due amount is too lucrative to ignore as the charges are just 5% of your total outstanding Credit Card amount. Many cardholders often pay just the minimum due each month, but the debt and accumulated interest slowly lead to financial stress.
Take a look at how just by paying the minimum due alone can harm your financial health.
Understanding Minimum Due
Minimum due amount (commonly termed as MAD) is typically 5% of your overall Credit Card outstanding as per your Credit Card bill. All unpaid amounts from your previous month’s bill along with the current month’s dues and EMIs of converted purchases are taken into account when calculating the minimum due amount.
Calculation Of Minimum Due Amount
Let us assume your Credit Card statement is issued on the 7th of every month and the last date of bill payment is 28th of every month. Let us assume you have made a purchase of Rs. 20,000 on November 15, which will reflect in your bill issued on December 7th. The due date for payment would be December 28th. The minimum due amount in this case would be Rs 1000 (5% of Rs. 20,000).
Why Paying Just The Minimum Due amount Is A Bad Idea
The biggest reason why many card holders opt for payment of just the minimum due balance amount is that it allows them to keep their Credit Card account regular without payment of all outstanding dues. It also helps the cardholders to avoid any late payment charges associated with their outstanding amount.
One of the biggest reasons why minimum due amount should be avoided is that it cuts out any minimum interest free period offered by your Credit Card. Considering the above example where card statement is issued on the 7th of every month and the last date of bill payment is 28th of every month, any purchase made between November 8th and December 7th will have its due payment date of December 28. So, for purchase made on Nov 8th, there would be an interest free period of 50 days and for a purchase made on Nov 30th there would be an interest-free tenure of 28 days.
The benefit of any interest-free period would not be available if you make the payment for minimum due amount and not for the full due amount in the previous statement. In fact you will now be charged an interest from the date of purchase till the final date of payment. So, for the November 30th purchase, interest will be charged for 9 days and will be continued to be charged till you settle the purchase fully.
You will not only lose access to any interest-free period, but the overall cost of the purchase would become expensive with a higher interest payout by paying just the minimum due amount every month.
For example, for a purchase of Rs. 10,000, your MAD may come to Rs. 500. If you just pay the MAD assuming rate of interest to be 36%, you end up paying back Rs. 15,499.50 with an interest component of Rs 5,499.50 over a 31-month period. Compared to a minimum monthly payment of Rs. 1000 it will take you just 13 months and an interest component of Rs 2,067.55 to fully pay your dues.
Minimum due amount may be helpful in times of a financial crisis but making a habit of just paying off the minimum due amount for credit card dues can lead to financial stress in the long term.