Introduction
Credit cards have become the most popular financial instrument in India, offering convenience, rewards, and the best way to manage expenses. One thing that tends to confuse a cardholder is the **Minimum Due Amount**. This blog will discuss everything you need to know about the minimum due amount on Indian credit cards, including its advantages, disadvantages, and latest information.
What’s the Minimum Due Amount?
Minimum due amount is the lower amount you need to pay before the due date to ensure you aren’t charged interest on your credit card account and also your account is not shut by the credit card provider. In India, it usually is 5% of your existing balance or a fixed amount (whichever is higher)
Suppose your outstanding balance is ₹10,000; then the minimum due amount will be ₹500, as that is 5% of ₹10,000.
Payment of the minimum due amount will save you from paying late fees and keep your credit score healthy. But it does not reduce the interest on the outstanding balance and can be a debt trap if not handled well.
In India, how is the Minimum Due Amount calculated?
In India, the minimum due amount is calculated on the below mentioned items:
1.% of Outstanding Balance In general, its about 5% of the outstanding balance.
2.Interest and Fees. Such fees and interests that may be incurred in a billing cycle, payable on or before the due date.
3.Fixed Amount. Some banks have a fixed amount (eg ₹ 500), irrespective of the calculated percentage mentioned below.
Example:
Outstanding Balance: ₹20,000
Required Minimum Payment Percentage: 5%
Interest and Fees: ₹300
Minimum Due Amount = (20,000 x 5%) + 300 = ₹1,300
Advantages of Paying the Minimum Due Amount*
1. No Late Fees:
By paying the minimum due amount, one can avoid late payment charges that range from ₹500 to ₹1,000 or even more for each occurrence, depending on the bank.
2. Maintains Your Credit Score:
As long as you pay at least the minimum due amount on time each month, you maintain a clean payment history, which is a key factor in your CIBIL or credit score.
3. Financial Flexibility:
By paying the minimum due amount in a crunch will ensure you will have your expense budget still intact and also not getting a default entry on your credit card.
4. Account Activity:
Paying the minimum amount due on time keeps your credit card account active. A long-standing credit card account helps your long-term credit history.
Disadvantages of Minimum Due Payments
1. Huge Interest Rates:
The major downside is the extremely high interest on the outstanding amount. Credit cards in India generally charge in the range of 24–48 percent interest per annum which can multiply the amount of debt very quickly.
2. Debt Trap:
Payment of the minimum due amount increases the time to pay off the debt, and you are trapped in a debt trap that is difficult to escape.
3. Negative Impact on Credit Utilization:
Even if you pay the minimum due amount on time, if you have a high balance relative to your credit limit (high credit utilization), it negatively affects your credit score.
4. Limited Financial Progress:
Explanation: By paying the minimum due, one is not paying off the debt, hence not progressing towards your financial goals such as saving
India Latest News and Updates, 13 October 2023
1. RBI Guidelines:
RBI has introduced some new rules regarding the transparency of the credit card bill. The banks will now have to show the interest payable amount and the duration in which only the minimum paid amount would settle the loan amount in full.
2. Digital Payment Tools:
Indian banks are now wooing credit cardholders with mobile apps and SMS reminders to help them visualize their spending and pay on time, to avoid falling into the trap of only paying the minimum due amount each month.
3. Financial Literacy Initiatives:
In contrast, Indian banks have focused on educating their customers on effective use of credit cards, including giving awareness on consequences of payment of only minimum due amount.
When to Pay your Credit card, Explained in India
1. Pay More Than the Minimum:
Whenever you can, pay more than the minimum payment due so that you can pay down your balance faster and incur less interest charges.
2. Auto-Pay:
Automated payment feature that helps you not miss any payments.You can opt to pay only the minimum or a fixed amount above the minimum.
3. Track Your Spending:
Keep a close watch on your credit card spending to prevent building a balance that is hard to pay off.
4. Opt for Balance Transfers:
If you have a big balance, consider transferring it to a card with a lower interest rate or a 0% introductory APR offer.
5. Self Help if Needed:
If you are finding it hard to pay the amount on your credit card, consider consulting a financial advisor or taking debt consolidation services.
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