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.
Here are some of the advantages of paying the minimum due every month.
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 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.
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.
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.
Credit cards have revolutionised the way people look at debt in India. For many, they are emergency ATMs that dispense plastic money in need. All is well while using the card, but when it comes to repaying the used amount, many cardholders tend to neglect. They either do last minute payments or pay only minimum amount due, pushing the remaining balance to the subsequent months. While both are valid things to do, one should know the consequences of such activities.
Starting with making credit card payment on the last date. Most of us have the habit of making last minute payments. It may not be a good idea when it comes to credit card payment. Unlike other utility bill payments, credit card bill payments, through a few channels, don’t get credited instantly. Banks typically take 2-3 days to process the payment based on the mode of payment. Hence, by making a payment on the due date you will end up receiving a late payment penalty. You may assume that you have made the payment on time, but due to the processing time involved in credit card payment processing, your payment gets delayed. The receiving bank also considers the date on which the payment is received, not the date on which you have made the payment. Therefore, to avoid late payment fee, make sure to pay your credit card bill 2 to 3 days before the due date.
Coming to the minimum amount due (MAD) payment. There are some genuine instances wherein we cannot afford to pay the entire bill amount. In such instances, we don’t have any other option except to pay the minimum amount due. But if you’re doing it without knowing what exactly happens by paying the MAD alone, you must know the consequences.
Once you have paid the minimum amount due on your credit card, the card issuer will start levying interest on the remaining amount. Further, any subsequent purchases made on the card also attract interest till the amount is settled in full. This will increase your credit card bill with the added interest rates and the respective taxes.
Hence, in order to avoid paying additional amount on your credit card, make sure to pay the bill in full and before the due date.
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