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    Why Paying Credit Card 'Minimum Payment Due' Does Not Help

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    Sometimes, it just happens that we make a lot of impulse purchases throughout the month and when we receive the credit card bill, the cash flows are stretched already. In such scenarios, we would not be always able to pay the total outstanding amount in entirety. Also, any balance that remains unpaid for the month accumulates high interest. In times like these, the “Minimal Amount Due” or famously MAD, can be our saviour. Minimum Payment means that it is a small fraction of the total outstanding amount that you can pay in case you are not able to make full payments. So, what is minimum amount due or the minimum payment amount? What is its advantage? Read on to find more about the same.

    Advantages of Paying the Minimum Amount Due:

    Here are some of the advantages of paying the minimum due every month.

    • The Minimum Amount Due (MAD) is the amount that you pay to the concerned credit card company on or before the due date to keep your credit card active and to keep the card account operative.
    • Making the Minimum Amount Due Payment will ensure that you will have to pay only the interest when required. There will be no penalty or late payment charges.
    • Your Credit Card Company or credit card issuing bank will not report you as irregular to credit bureau if you make Minimum Amount Due Payments on time.
    • If you do not make credit card payments on time, your credit score will be adversely affected. To avoid this, you can pay at least the minimum amount due as mentioned in your credit card bill on time.

    Calculation of Minimum Amount Due:

    As is the case with many credit card companies, the Minimum Amount Due is generally 5% of the balance outstanding as calculated on statement date. If you have converted your purchases to EMI or if you have enabled the EMI balance transfer option, the same will also be added to your Minimum Amount Due. Also, if there are any unpaid Minimum amount from the previous credit card statement cycle, it will also be added to the minimum due for current month.

    Let us consider an example for minimum amount due calculation and make some assumptions for the same.

    • The fee for late payment is Rs. 500.
    • The credit card statement is generated at the 5th of every month.
    • Interest rate is charged at 3% every month
    • The payment is to made on or before 26th of every month.

    The following example will show how the minimum amount due is calculated.

    Date

    Transaction Details

    Transaction Amount

    Remarks

    July 15

    Purchase

    Rs. 10, 000

    Interest Free Credit period.

    August 5

    Statement

    Rs. 10, 000

    Due date is August 26. Minimum Amount Due is Rs. 500 (5% of Rs. 10, 000)

    August 20

    Payment

    Rs. 500

    Minimum Amount Due Payment

    August 25

    Purchase

    Rs. 15, 000

    No interest free credit period

    September 5

    Interest

    Rs. 682

    On purchase

    September 5

    Service Tax

    Rs. 95

    Service tax on interest

    September 5

    Statement

    Rs. 25, 278

    Minimum Amount Due is Rs. 1263.90 (5% of Rs. 25, 278)

    September 26

    No payment is made. Late payment fee will be applicable.

    September 30

    Late Payment Charges

    Rs. 684

    Including service charges.

    October 5

    Interest Charges

    Rs.. 778

    October 5

    Service Tax

    Rs. 109

    Service tax on interest

    October 5

    Statement

    Rs. 26, 848

    Minimum amount due Rs. 2,542 including the previous due of Rs.1, 263.9

    The fact that late payment penalty was not charged in August since the minimum amount has already been paid is obvious. Also, the interest has been charged on the amount unpaid from the purchase date and not from the due date or statement date. Hence, by making the minimum due payment, you cannot avoid the high interest. Also, if you do not make the minimum payment by due date, late payment penalty will also be charged.

    Disadvantages of Paying only the Minimum Amount Due:

    • One major advantage of making regular, full payments of your credit card outstanding is that you get interest free credit period for up to two months. Not only that, you will also get up to three weeks’ time to clear the outstanding amount after statement is issued.
    • You will not be offered any interest free credit period if you have paid only the Minimum Amount Due (MAD) and not the credit card outstanding in full. Rather, you will be charged interest amount from the date of purchase.
    • The interest amount will also keep accumulating till you settle the dues. So, even if you have paid the Minimum Amount Due and have avoided paying any penalty for late payment, you will not be able to enjoy the benefits of interest free credit period.

    Consider an illustrations to see how interest is charged on credit cards and how paying just the Minimum Amount Due every month will lead to accumulation of interest,

    Date

    Transaction Details

    Transaction Amount

    Remarks

    July 15

    Purchase

    Rs. 5, 000

    Interest Free Credit period

    July 30

    Purchase

    Rs. 5, 000

    Interest Free Credit period

    August 5

    Statement

    Rs. 10, 000

    Due Date - August 26

    Minimum Amount Due is Rs. 500 (5% of Rs. 10, 000)

    August 8

    Purchase

    Rs. 8, 000

    Interest Free Credit period

    August 20

    Payment

    Rs. 10, 000

    Full Payment

    August 25

    Purchase

    Rs. 15, 000

    Interest Free Credit period

    September 5

    Statement

    Rs. 23, 000

    For bills on August 8 and August 25

    Due Date is September 4

    Minimum amount Due (Rs. 1, 150)

    September 12

    Purchase

    Rs. 10, 000

    Interest Free Credit period

    September 26

    Payment

    Rs. 1, 150

    Minimum Amount Due paid

    Interest Free credit period for August 8, 25 and 12 will be reversed.

    Interest will be charged from the date of purchase.

    September 30

    Purchase

    Rs. 5, 000

    No Interest Free Credit period

    October 5

    Interest

    Rs. 1, 679

    Interest Charged for all purchases from date of purchase.

    October 5

    Tax

    Rs. 235

    Service tax on interest

    October 5

    Statement

    Rs. 38, 764

    Statement Amount Rs. 23,000 - Payment of Rs. 1, 150 + Purchases Rs. 15, 000 + Interest Amount Rs. 1, 679 + Service Tax

    From the above example, it can be understood that for bills on August 8, no interest was charged in the statement dated September 5. However, because only the Minimum Amount Due was paid, the interest free credit period was taken back and interest was charged.

    Can you just keep paying the Minimum Amount Due Every Month?

    Yes, you can keep your credit card active by paying just the Minimum Amount Due every month. But, you will have to pay high interest charges and also, there will be no interest free credit period. Just remember that the less you pay of the outstanding amount, you will be made to pay more in interest. Credit card debts are very expensive and you must always make credit card payments in full. When there’s a financial contingency or cash flow crisis in a particular month, you can have just paying the Minimum amount due as an option. You will avoid credit score hits and late payment charges by paying the Minimum Amount Due - but, this can only be a short term arrangement.

    In conclusion, you will have to cut down on expenses and revisit your budget if you constantly find yourself being able to pay only the Minimum Due amount. In case the credit card interest has become too much to bear, you can tru personal loans or balance transfer options.

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