Credit cards can make everyday spending convenient, but the real cost can emerge when the monthly bill arrives and you are unable to pay the entire outstanding amount. While paying the full bill is generally the best way to avoid interest, cardholders are also given the option of paying a smaller minimum amount by the due date.
For instance, if your credit card bill is Rs 1 lakh, the statement will typically show both the total amount due and the minimum amount due. If paying the entire Rs 1 lakh is difficult, the minimum due may appear to offer temporary relief.
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However, paying only the minimum amount does not make the remaining balance interest-free. Instead, the unpaid amount can continue to attract finance charges, which can be considerably higher than the interest rates charged on many other forms of borrowing.
What Happens If You Pay Only The Minimum?
Paying the minimum due on time can help you avoid late-payment charges and keep the account from being treated as overdue. However, the remaining balance is carried forward and can attract finance charges.
In many cases, the minimum amount due can be around 5% of the total outstanding amount. If the minimum due on a Rs 1 lakh bill is Rs 5,000, the remaining Rs 95,000 is carried forward.
Another important point is that you can lose the benefit of the interest-free credit period when the total amount due is not paid by the due date. Interest may then be charged on the outstanding balance, subject to the card issuer's terms and after adjusting for payments, refunds and reversed transactions.
How Much Interest Can Be Charged?
Credit card finance charges can be high. For example, SBI Card lists finance charges of up to 3.75% per month, or 45% per annum, on several unsecured credit cards. The applicable rate varies depending on the card and issuer.
Consider a simplified example where a Rs 1 lakh outstanding balance attracts a finance charge of 3.75% a month and there are no fresh purchases.
Credit Card Outstanding: Rs 1,00,000
Finance Charge: 3.75% Per Month Or 45% Per Annum
Monthly Payment: Rs 5,000
New Spending On The Card: Nil
The finance charge for the first month would be approximately:
Rs 1,00,000 × 3.75% = Rs 3,750
Goods and Services Tax (GST) at 18% on the finance charge would be approximately Rs 675. This means the finance charge plus GST would come to around Rs 4,425.
If the cardholder pays Rs 5,000, only around Rs 575 would effectively reduce the outstanding balance.
New Purchases Can Make The Problem Worse
The situation can become even more difficult if you continue using the credit card while an earlier balance remains unpaid.
For example, suppose Rs 95,000 remains outstanding after a payment and you then spend another Rs 20,000. Your overall debt could rise again instead of falling.
New purchases can also affect the interest-free period and may result in additional finance charges, depending on the card's terms.
What Should You Do If You Cannot Pay Rs 1 Lakh?
If paying the entire Rs 1 lakh is not possible, the first step should be to avoid adding fresh expenses to the card wherever possible.
You should also try to pay substantially more than the minimum amount. The larger the payment towards the outstanding balance, the lower the amount on which future finance charges can accumulate.
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Most importantly, paying only the minimum due should be viewed as a short-term option rather than a repayment strategy. A large outstanding balance can take years to clear when credit card finance charges continue to accumulate.
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