Is Paying The Lower Minimum Amount On Credit Card Good For You?

A credit card has a monthly bill that is generated that lists out the amount that is payable due to the various amounts spent using the card.

There are two figures that will be witnessed on the credit card bill, where the first is the total amount that is due and the other is the minimum amount due. The minimum amount due is calculated in a specific manner, and this can vary for different cards and banks.

Many card users wonder whether a lower minimum amount due is good for them or whether keeping it higher is better. Here is how one can analyse the situation:

The minimum amount due on the credit card bill is the amount that has to be paid to ensure that the cardholder is not considered a defaulter.

When a credit card is used, the amount that has been spent has to be paid back to the bank by a specific due date. However, not everyone is able to pay off the full amount by the due date, but they still need to pay the minimum amount. As long as the minimum amount is paid, the remaining figure will get the interest metre ticking.  On the other hand, not paying even the minimum amount would be considered a default, and not only will there be a penalty for such nonpayment, but there would also be a significant impact of this on the credit score of the individual.

The minimum amount due is important only for those who are not going to pay the full amount of the credit card bill. This is to ensure that those who are not paying the full amount are at least paying the minimum amount to avoid a default.

For example, if Rs 20,000 is outstanding and Rs 1,000 is the minimum amount due, then at least this amount has to be paid by the due date. Many people just ignore their credit card dues, which is not a good thing. For those who are paying off the full amount, the minimum amount due has no implication because it is not relevant for them.

The manner in which the minimum amount due is calculated is based on a certain formula. This is normally a percentage of the expenses that have been made using the card, including cash withdrawals, plus the full amount of the fees, charges, interest, taxes, etc.

For example, if the rate is 5% of the expenses made and the expense figure is Rs 12,000 plus there are fees of Rs 400, then the minimum amount due will be Rs 1,000, that is, 5% of Rs 12000 + Rs 400. This minimum amount figure will thus vary according to the usage of the card, and if one looks at it, this is not very high, so there is no excuse for forgetting or not paying the amount.

There are times when there are changes made to the percentage used in the calculation of the minimum amount due. A higher rate will mean that the minimum payment figure will go higher, but this is not necessarily a negative thing because ultimately the cardholder has to pay the full amount that is due on the card.

Postponing the payment will only mean that a high-interest rate will start to be levied on the outstanding. Lowering the minimum amount due might seem to be a good thing as this requires a lower minimum payment, but for those who are paying off the full amount, this has no meaning. In addition, if one is sticking to just paying off the minimum amount, then there has to be a realisation that  a lower minimum amount being paid will translate to a higher interest cost on the remaining amount due. A balancing act has to be done, but ultimately, the individual will end up bearing a high cost.

Arnav Pandya is founder of Moneyeduschool