Credit cards have become one of the most preferred financial instruments for many users as they offer unparalleled convenience, allowing users to make purchases and manage unexpected expenses.
The credit card issuers allow flexibility in repayment of outstanding dues, which makes it convenient for users to meet immediate financial needs without any extra charges. However, the users need to make the payment within the due date to avoid late fees and interest charges.
If you are running short of cash or enough funds to clear the entire outstanding amount, you can also make a partial payment. This is where the minimum amount due becomes quite useful. It's important to know the crucial factors about the minimum amount due on credit cards to avoid any financial crisis in future.
The minimum amount due on a credit card refers to the smallest amount users can pay on their total due in each billing cycle. Paying the minimum due can make a big difference to your creditworthiness. By paying the minimum amount on your credit card outstanding, you can avoid late payment fees and interest charges. Only paying the lowest amount to keep your credit card account active can lead you to a financial crisis in the long run.
When Should You Pay Minimum Amount Due?
Paying the minimum amount due is not ideal, but could be useful in specific situations, including:
If you have an unexpected financial emergency, paying the minimum allows you to avoid late fees while giving you time to organise funds.
Paying at least the minimum amount due on your credit card helps you avoid a negative impact on your credit score for failed payments.
If a credit card holder is facing a cash crunch due to unanticipated bills or income loss, paying the minimum amount can be an immediate solution.
When you have many obligations, it may be beneficial to pay simply the minimum amount on lower-interest credit cards, which allows you to prioritise repaying high-interest loans first.
Risks
While paying only the minimum amount seems like a convenient way to manage finances, it can lead to long-term financial strain.
Making minimum payments on a credit card prolongs the repayment period and leads to a financial burden.
While making only the minimum payment on a credit card keeps your account in good standing, a high credit utilisation ratio (the percentage of your credit limit you're using) can negatively affect your credit score.
As your credit card's outstanding balance increases, your available credit limit comes down, which may restrict further use of the credit card.
If you just pay the minimum amount and not the entire credit card balance, you will be charged interest starting from the day of purchase on the outstanding balance. This will increase your overall financial burden.
Credit cards typically have high annual interest rates, ranging from 30% to 45% in India. If you simply pay the smallest amount due on your credit card, the remaining balance will accrue interest and this will compound over time.
It's advisable to carefully evaluate the advantages and limitations of paying the minimum amount due on your credit card outstanding before utilising this feature.
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