Minimum due on credit cards explained: 6 things every cardholder must know

Paying only the minimum amount due on a credit card is an option often chosen by cardholders facing short-term financial difficulties. Given that it avoids late payment charges and helps keep the account regular, it is still far from a cost-efficient repayment strategy.

This makes it essential for all credit card holders to clearly understand the basic concept of minimum due and how it works, along with its long-term implications on the borrower's credit profiles. Understanding these concepts is critical for managing credit card debt diligently.

What is the minimum due on a credit card?

To put it simply, the minimum amount due is the lowest possible payment a credit card holder must make by the due date to keep their credit card account active. Generally, it includes 5% of the total outstanding along with applicable interest, GST, EMIs and any other applicable fees.

Furthermore, the remaining balance is rolled over to the next billing cycle and attracts interest. That is why it is always better to clear out the entire payment as soon as possible.

6 factors to know before paying the minimum due

1. High interest rates apply:Unpaid balances continue to attract interest charges. These charges can quickly accumulate, making the entire repayment process difficult to manage.
2. The interest-free period is lost:The purchase of new products and services starts accruing interest immediately, until the entire outstanding payment is cleared.
3. Debt repayment gets stretched:When a borrower pays only the minimum, then such a practice can significantly extend the repayment period. Managing high debt for years together can take a psychological toll on borrowers.
4. Processing fees continue to pile up: Other expenses, such as GST, processing fees and hidden charges, also continue to add economic burden, increasing the overall borrowing cost.
5. Credit utilisation ratio rises: Carrying high balances can result in an increasing credit utilisation ratio, which may harm your credit profile over time. A high credit utilisation ratio is a symbol of overdependence on credit, i.e., credit hunger. It can drastically bring down your credit score.
6. Limited future benefits:Frequent minimum-only payments can impact the borrower's eligibility for better loan offers, higher credit limits, or better credit card offers.

Risks of credit cards

Therefore, over-reliance on credit cards can result in revolving debt, very high interest outgo and poor spending discipline. Easy availability of credit can encourage overspending, lavish spending, thus making balances harder to repay.

It is critical to ensure that paying the minimum due should only be a temporary fallback option. It should not be a habit. To bring down interest costs and stay financially prepared, credit card holders should focus on paying the total amount due or as much as possible above the minimum every billing cycle.

Disclaimer: MintMoney has a tie-up with fintechs for providing credit. You will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.