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What Is Minimum Amount Due in Credit Card?
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It’s the beginning of the month, and you are all set to pay your monthly bills. While scrolling through them, you catch your credit card statement. The total outstanding amount is huge, and you cannot currently repay it, but then you catch the minimum due, and it seems to fit your financial budget for the month. But what is the minimum due? And is there any benefit of repaying only the minimum due on your credit card?
What is Minimum Amount Due in Credit Card?
The minimum payment on a credit card is the smallest amount a cardholder needs to pay by the due date to keep their account in good standing. This amount is usually a small percentage of the total outstanding balance, typically between 5% and 10%. Credit card issuers calculate this minimum payment using a specific formula that takes into account the current balance, recent purchases, and any applicable fees.
How Does a Credit Card Minimum Due Work?
The minimum amount due on your credit card is the smallest amount you can pay towards your monthly credit card balance. So, if you face a cash crunch for the month, you can pay the minimum balance due instead of paying the entire amount to avoid penalties or late payment charges. However, you should be aware that the remaining amount will incur interest rates even after paying the minimum amount.
The minimum due on a credit card is the smallest payment amount, typically calculated as a percentage of the outstanding balance. Some banks may also set a fixed monthly payment towards your credit card balance. If your balance falls below the minimum payment requirement, you’ll need to pay the full amount. It’s important to understand the minimum payment policy of your issuing bank before applying for an online credit card, as this policy can vary between banks.
Calculating the Minimum Due on a Credit Card with Example
To determine the minimum due on your credit card, simply refer to your monthly billing statement. The minimum due is calculated as a percentage of your outstanding balance. Both the total amount due and the specific minimum amount due for the billing cycle are highlighted on your statement. The percentage used to calculate this amount can vary based on your card issuer’s policies and the type of credit card you have.
Example: if your outstanding balance is ₹20,000 and the minimum due is set at 5%, your required payment would be ₹1,000 (₹20,000 x 0.05).
Benefits of Paying the Minimum Amount on Your Credit Card
Paying the minimum balance on your credit card is important, especially if you don’t have the full amount to pay. There are several benefits of doing so, including:
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Avoid Late Payments
If you don’t pay the minimum due on your credit card by the due date, your card issuer may charge late payment fees. These fees can vary depending on your outstanding balance and can add unnecessary financial strain, which can be avoided with timely payments. Depending on your balance, late fees could range from a few hundred to several thousand rupees.
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Maintain Your Credit Score
Your credit score is a numerical indicator of your creditworthiness and influences your ability to secure credit in the future. Making timely minimum payments on your credit card helps maintain a positive credit history, while missed or late payments can harm your credit score. Whenever you miss a payment, your card issuer reports it to credit bureaus, negatively affecting your credit score. This can make it harder to obtain loans or credit lines in the future.
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Monitor Your Spending Patterns
Paying the minimum amount due on your credit card helps monitor your spending pattern by ensuring you only cover essential expenses while leaving a balance. This approach forces you to track and manage your expenditures more closely, as the remaining balance accrues interest, making you more conscious of unnecessary spending.
How Does Your Credit Card Billing Cycle Work?
Understanding the minimum amount due on a credit card starts with knowing how the billing cycle works. Typically lasting around 30 days, this cycle runs from the date of the last statement to the closing date of the current one. During this time, all transactions made with the credit card are recorded, and a statement is produced at the end of the cycle. This statement outlines key details such as the total outstanding balance, new charges, minimum amount due, and the due date.
After the statement is issued, credit card companies usually allow 15-20 days for you to pay off the full balance, make a partial payment, or, at the very least, cover the minimum amount due before the deadline.
Risks of Paying Only the Minimum Amount Due on Your Credit Card
While there are benefits to paying the minimum amount due on your credit card when you cannot make full payments, there are several disadvantages to only paying the minimum amount on your credit cards. These include:
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Increases Your Interest Rates
One drawback of only paying the minimum amount due is that your interest charges may rise along with your balances. Clearing last month’s interest can be difficult unless you have a 0% APR. Continuing to make just the minimum payment can lead to falling behind on your credit card bills. Neglecting to pay your credit card bills can negatively impact your credit score and significantly increase your interest charges.
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Extends Your Debt Period
The credit card issuer determines the minimum credit card payment based on a percentage of your balance or a fixed amount, whichever is higher. This ensures you can avoid late fees, but it’s important to realise that this approach will extend the time it takes to pay off your debt. Before applying for a credit card, it’s advisable to check the minimum due warning in your online account. This will show you the minimum amount required and the estimated time to pay off your balance if you only make the minimum monthly payment.
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Raises Your Credit Utilisation Ratio
If you continue to repay only the minimum amount due on your credit card every month, you increase your credit utilisation ratio, which is one of the main determining factors when assessing your credit score. This high credit utilisation ratio negatively impacts your credit score.
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Reduces Your Creditworthiness
If you only pay the minimum amount on your credit card bills, you will accumulate debt over time. This reduces your creditworthiness, and lenders may see you as a high-risk borrower. If you are labelled as one, your chances of getting a loan in the future decrease, or lenders may give you a loan but at high interest rates.
Can You Continue to Only Pay Minimum Due Every Month?
Yes, you can keep your credit card active by paying only the minimum amount due each month. However, this will result in high-interest charges, and you won’t benefit from an interest-free credit period. Remember, the less you pay off your outstanding balance, the more interest you will incur. Credit card debt can be quite costly, so it’s best to pay your balance in full whenever possible. If you face a financial emergency or cash flow issue for one month, paying the minimum amount due can help you avoid late payment fees and damage to your credit score, but this should be a temporary solution.
How to Avoid Late Payment Fees
One of the main reasons you need to skip the late payment charges is because it negatively impacts your credit score, and you incur high interest rate charges later on in your billing cycle. But how to avoid these late payment charges? Here are some tips:
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Set Payment Reminder
Using electronic reminders, like email alerts or mobile notifications, can help you keep track of your credit card due dates. This strategy ensures you stay on top of your payment schedule.
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Automate Your Payments
Most banks or credit card issuers have the facility to set automatic payments for paying either the full or minimum amount due on your credit card. Automating your payments guarantees that you won’t miss a due date and alleviates the stress of accumulating late payment fees.
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Choose the ECS Facility
Consider using the Electronic Clearing Service (ECS) provided by credit card issuers to automate your bill payments through your linked bank account. This option allows your payment to be directly debited from your account on the due date, and you’ll receive notifications via SMS and email.
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Prioritise Timely Payments
The best tip to avoid late payment charges on your credit card bill is to treat it equally as any essential expense. Set aside funds in advance to cover at least the minimum amount due—or, if possible, the full outstanding balance—on time. This approach will have a positive effect on your credit score.
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Monitor Your Spending Patterns
It’s important to monitor your credit card expenses to avoid exceeding your credit limit. Additionally, ensure you have enough funds in your bank account to settle your outstanding credit card bills. Keeping an eye on your spending patterns allows you to plan your financial expenses more effectively in advance.
Ultimately, if you consistently find yourself only able to pay the minimum amount due, it’s time to reassess your budget and cut back on expenses. If the interest on your credit card has become unmanageable, consider exploring personal loans or balance transfer options.
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Frequently Asked Questions (FAQs)
What happens if you do not pay before the due date?
You will be charged a late payment fee if you do not make any payments for your credit card bill, even the minimum balance, before the due date. Delaying the payments will affect your credit score, keep accumulating late payment charges, increase the outstanding interest, and lose the interest-free period on your credit card.
What happens when you only make the minimum payment?
If you only pay the minimum due on your credit card, the remaining balance will accumulate interest rates. However, paying the minimum due is better than skipping the monthly payment altogether because it helps you keep your credit card active and avoid late payment penalties.
Authors
Priyanka Rao
Priyanka Rao is a content strategist for Jupiter.Money, and specializes in writing on topics related to finance, banking, budgeting, salary & wages, and other financial matters. She has a passion for creating engaging content that resonates with audiences across various digital platforms. In her free time, Priyanka enjoys traveling and reading, which allows her to gain new perspectives and inspiration for her work. With a keen eye for detail and a creative mindset, Priyanka is committed to creating content that connects well with her readers, enhancing their digital experiences.
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