Sometimes you make a lot of purchases using your credit card. You pay almost all the expenses using your credit card. But, when you receive the credit card bill, you won't be having enough money to pay off your bills. If you don't settle your credit card bill on the due date, you will be charged interest on the outstanding balance as well as you need to pay the late payment penalty. The interest charged on the credit card is around 2% to 3% a month.
Many people in order to escape from the late payment charges, simply pay the minimum amount due. This is the minimum amount you have to pay by the due date. This will be 3% of the amount you have to repay on the due date. But, paying the minimum amount due on the credit card, does not save you from paying interest on the outstanding balance on your credit card.
Why people pay the minimum balance on credit card?
1. You do not have to pay penalty or late payment charges, if you pay the minimum balance by the due date.
2. If you pay the minimum balance on your credit card, your credit score will be ok. In case you do not pay your minimum balance, your credit score will be badly affected.
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Why paying minimum balance is a bad idea
Paying minimum balance on the credit card is a trick played by the bank to cheat you. If paying the minimum balance on credit card option was not there, you would have cleared all the credit card dues within the due date. Now, when you have the option of paying the minimum balance, you tend to postpone it.
Let us consider that you have to pay Rs 20,000 credit card bill on May 10. But, instead of settling the entire bill, you pay the minimum amount due, which is INR 600 (3% of your balance outstanding). Now your outstanding balance is Rs 19,400. You have to pay an interest of 3% a month on the outstanding amount of INR 19,400. You have to pay an interest of INR 582 (3%@ 19,400). This Rs 582 will be added to your outstanding amount of Rs 19,400. Now you are required to pay 19,982. This amount is just Rs 18 less than the original outstanding balance.
Another disadvantage of paying the minimum balance on credit card is you will not be given an interest-free period. Instead, you will be charged interest from the date of purchase.