Credit Card minimum payment: Why paying just that can be financial trap

Credit cards offer unmatched convenience and flexibility, but improper management can lead to financial troubles. A key aspect of credit card usage is understanding the "minimum amount due" listed on your monthly statement. While paying this amount keeps your account in good standing, relying solely on it can have long-term financial consequences.

The minimum amount due is the smallest monthly payment required to avoid late fees and maintain your credit account in good standing. It represents only a fraction of your total outstanding balance, allowing you to meet your basic obligations without defaulting. However, any unpaid balance carries over to the next billing cycle, accumulating interest.

Credit card issuers calculate the minimum amount due as a percentage of the outstanding balance, typically ranging from 2% to 5%. Additional components may include:

Interest and fees: Charges for late payments or exceeding your credit limit are added.

EMI payments: If you've converted purchases into Equated Monthly Instalments (EMIs), the monthly instalment forms part of the minimum due.

For example, if your balance is Rs 50,000 and the issuer applies 3%, your minimum due will be Rs 1,500, plus any applicable fees or EMIs.

Although paying the minimum due can be convenient, it's not a sustainable financial strategy. Here's why:

High-interest costs: Credit cards in India often carry annual percentage rates (APRs) of 30% to 40%. Paying only the minimum means the remaining balance accrues steep interest, compounding your debt.

Extended repayment period: Minimum payments prolong debt clearance, converting manageable balances into significant burdens.

Reduced credit limit: A growing balance reduces your available credit, limiting financial flexibility.

Credit score impact: While timely minimum payments prevent delinquency, a high credit utilization ratio can negatively affect your credit score.

While it's not a recommended habit, paying the minimum can be useful in specific scenarios:

Temporary financial crunch: If you face unexpected expenses, paying the minimum can prevent late fees.

Preserving credit score: Ensuring timely minimum payments avoids delinquency reports to credit bureaus.

Pay in full: Clear your balance monthly to avoid interest charges.

Budget for payments: Allocate funds to ensure timely payments.

Set reminders: Automate payments to avoid missing deadlines.

Track spending: Monitor expenses to prevent overspending.

Consider EMIs for big purchases: Convert high-value transactions into EMIs to manage repayments effectively.