Credit cards are a double-edged sword; if you know how to wield them, you'll reap numerous benefits, but if you don't, you'll end up harming yourself. We have often seen people get trapped in debt through credit cards, the reason being that people lack the technical knowledge associated with credit cards. In this article, we will discuss the ‘Minimum Amount Due’, which is a significant factor in credit cards.
If you also use a credit card, you must receive its statement every month. When you pay the bill, you are given the option of ‘Minimum Amount Due’. If you do not have the money to pay the entire bill at that time, you can choose this option. However, this convenience also comes with certain disadvantages.
Those who have just started using credit cards do not understand the basic concept of ‘Minimum Amount Due’. However, it is crucial to know and understand this so that credit card payments can be made correctly and you do not suffer any losses in the future. Let us understand both its advantages and disadvantages.
Your Account Health Will Remain Good: If you do not have enough funds to pay the entire bill immediately, you can pay only the minimum amount due. This will help you avoid late fees. It will also help you maintain your credit score and keep your credit card account in good standing.
Protection from Default: If you make the minimum due payment, the bank will not classify your card as a default. This means you can get relief if you are facing any financial difficulties.
Short-Term Relief: If there is a major expense in the near future, due to which you do not want to pay the full credit card bill, you can make the minimum payment at that time. In this case, you get some short-term relief. You can make the full payment the next time you have the funds.
Interest Will Increase Rapidly: If you think that by making the minimum payment, it will be deducted from the total payment and you will pay the rest later, you are absolutely wrong.
The remaining portion of your outstanding amount accrues a very high interest. This can often be up to 30-40% per annum, as you lose the interest-free period.
Risk of Falling into Debt Trap: If you habitually make only the minimum payment, it can take years to pay off your remaining balance. Not only this, interest and fees can also ruin your finances.
Impact on Credit Score: While making the minimum payment helps you avoid default, carrying a large outstanding balance increases your credit utilisation ratio, which can damage your credit score, leading to difficulties in obtaining loans in the future.
