Now that 2020 is here let’s make a plan to strengthen finances in the New Year. Merely earning more money is not going to help you secure your financial future. Instead, you need to make a New Year resolution to manage your Credit Cards in a better way.
It does not matter if you are using the Best Credit Cards in India when you do not know how to manage repayments properly. The financial indiscipline can be detrimental to your finances. One of the best resolutions that you should make for the New Year 2020 is never to pay the minimum amount due against your credit card.
The concept of the minimum dues payment on cards-
When you scan your Credit Card Statement, there are two types of balances that are reflected i.e., the total amount due and the minimum amount due. The total amount due reflects the total purchases you have made in a month plus any unpaid amount from the last month. The minimum amount due is the amount you need to pay for a month to avoid any late payment charge.
The minimum amount due is thus a percentage of the total amount due. Depending on the Credit Card you are using, the minimum amount due can vary between 5% to 10% of the total outstanding. For instance, in the case of SBI Credit Cards, the minimum amount due is 5%, while in the case of Kotak Mahindra Bank Credit Card, the minimum amount due is 10%.
While making payment for the minimum amount due will save you from late payment charges, but it should be used only during emergencies. Do not make it a habit for its consequences are quite serious.
Why paying minimum dues is a bad idea?
Irrespective of the fact if you are using the best Credit Cards in the market, paying only a minimum amount due for an extended period is a recipe for disaster. In the long run, it will do you more harm than good and can disrupt your financial planning.
Here are the reasons that explain why paying the minimum amount due is a bad idea:
Higher interest cost: When you pay only the minimum amount due against your Credit Card, it primarily caters to interest cost. Usually, the monthly interest rate against Credit Cards varies between 3.5% to 4%, whereas the minimum amount due is generally 5%. So, you can see that by paying only the minimum amount due, only a small part of the principal outstanding is being repaid. Consequently, in the next billing cycle, the bank will levy the interest against the entire outstanding amount. Thus, you not only lose on the benefit of the interest-free period but also pay higher interest costs, putting up additional stress on your finances.
Impact on credit score: Credit Card debt is one of the most severe factors that can negatively impact your Credit Score. When you are paying only the minimum amount due for an extended period, the total outstanding against your Credit Card will reduce very slowly. As a result, your credit utilisation ratio will remain high, which will reflect your dependency on expensive credit. The credit rating bureaus like CIBIL or Experian, view this as financial indiscipline and will thereby reduce your Credit Score. The reduction in Credit Score will impact you on many levels, such as difficulty in getting a loan and lenders charging a higher interest rate while extending any credit facility.
Increased APR: When you pay only the minimum amount due over a period, the Credit Card issuer starts viewing you as a high-risk customer. You are indirectly telling the bank that you are unable to manage the repayments. As the risk factor will increase for the bank, they will start charging a higher APR (Annual Percentage Rate) against your Credit Card, further complicating the situation for you.
Reduction in credit limit: Most Credit Card companies and banks conduct a periodical review of all their Credit Card customers. This review is done to understand the user behaviour of the customer and thereby estimate the risk involved. As you are only paying the minimum amount due over an extended period, it is likely that the bank will reduce your credit limit to reduce its risk.
Debt trap: Paying only a minimum amount due will push you toward a debt trap. As Credit Card debt is the most expensive form of debt, higher is the amount outstanding, higher will be the interest cost for you. Consequently, over a period as you are unable to repay the principal outstanding, the interest cost will become so high that it would be virtually unbearable for you.
Longer to repay the debt: By sticking only to paying the minimum amount due approach, you will be embroiled in the repayment of debt for a long period. For instance, if your SBI Credit Card dues are Rs. 50,000, and you choose only to pay the minimum amount due of 5%, i.e., Rs. 2,500 per month, it can take you up to 42 months to repay the entire amount due, subject to the interest rate.
When such long-standing dues are being reflected in your Credit Card account, your credit score will also take a hit, further complicating the situation of your finances.