What is Minimum Amount Due in Credit Cards & Its Impact on CIBIL

Estimated reading time: 6 minutes

When you hear about what is the minimum amount due on a credit card, it refers to the smallest amount you must pay on your credit card bill to avoid late fees and keep your account in good standing. This amount is crucial not just for keeping your card active but also for maintaining your credit health.

Paying this minimum amount is a basic step in managing your finances. When you meet this obligation, you protect your credit score from potential damage caused by missed payments. However, paying only the minimum each month can lead to more interest over time and might suggest to lenders that you are struggling financially. This section will explain why it’s important to understand the minimum payment and how it fits into your overall credit management strategy.

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Understanding the Minimum Amount Due

When you use a credit card, the bank asks you to pay a part of what you owe every month. This is called the minimum amount due. It’s like a small piece of your total credit card bill. Usually, this amount is a percentage—often 5% or 10%—of all the money you owe on your card.

For example, if you owe ₹10,000 on your card, and the minimum is 5%, you need to pay at least ₹500 by the due date. Paying this minimum helps you keep your credit card active and stops you from getting late fees.

Paying just this minimum amount might seem easy and helpful when you don’t want to spend much. However, it’s important to know that doing this often can make your debt grow because of interest. Also, if you keep doing this, it might make it harder for you to get loans or good credit offers later because it affects your credit score.

A credit score tells banks how good you are at handling money. When you only pay the minimum, it can show that you might be struggling with your finances. To keep your credit score healthy, try to pay more than the minimum when you can. This shows you are good at managing your money and keeps you away from building up too much debt.

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How is the Minimum Due Calculated?

Let’s find out how your bank figures out the smallest amount you can pay on your credit card each month. This amount is called the minimum due. The bank uses a simple math formula to decide this, and it looks at a few things:

1. Outstanding Balance:
This is how much money you owe on your credit card.

2. New Charges:
These are new purchases you made with the card.

3. Any Fees:
Sometimes, there are extra costs like late fees or finance charges if you didn’t pay your last bill on time.

To make it easy to understand, here’s a quick example:

Imagine your total debt on the credit card is ₹20,000. Your bank has set the minimum payment at 5% of your total debt. So, your minimum due would be 5% of ₹20,000, which is ₹1,000. This means, for this month, you need to pay at least ₹1,000 to keep your credit card in good standing.

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Implications of Paying Only the Minimum Due

When you use your credit card, you get a bill every month. The bank tells you the smallest amount you must pay by the due date, called the minimum due. Paying this amount has some quick benefits but also some long-term effects you should know about.

Short-Term Benefits:

• Avoid Late Fees: If you pay the minimum due on time, you won’t have to pay extra money as late fees. This is good because it keeps extra costs down.
  
• Keep Account in Good Standing: Paying at least the minimum due helps keep your credit card account active and in good shape. This means you can keep using your card without any problems.

Long-Term Consequences:

• Interest Adds Up: When you only pay the minimum, most of your payment goes to cover the interest, and very little reduces what you actually owe. This means you end up paying a lot more over time because the interest keeps growing.
  
• Impact on Credit Score: If you keep a high balance on your card and only pay the minimum, it can lower your credit score. A lower score can make it harder and more expensive to borrow money in the future.

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Tips for Managing Credit Card Payments

Managing your credit card payments wisely is key to maintaining good financial health. Here are some straightforward tips to help you handle your credit card payments better:

Aim to Pay More Than the Minimum:

• Reduce Debt Faster: Whenever you can, try to pay more than the minimum amount due on your credit card. This will help you reduce your debt much faster. The less you owe, the less interest you have to pay.
  
• Improve Your Credit Score: Lowering your total debt quickly can also help improve your credit score, making it easier for you to get loans with better terms in the future.

Set Up Reminders and Automatic Payments:

• Never Miss a Payment: To make sure you always pay on time, set up reminders on your phone or calendar. This can help you avoid late fees and penalties.
  
• Use Automatic Payments: If you can, set up automatic payments for at least the minimum amount due. This way, you won’t have to worry about forgetting to make a payment. If you’re comfortable, you can even automate paying a fixed amount above the minimum to cut down your balance faster.

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Conclusion

Understanding what is minimum amount due in credit card is crucial for managing your finances effectively. This amount, which is usually a small percentage of your total outstanding balance, is the least you can pay to keep your account in good standing. By paying at least this minimum, you avoid late fees and keep your account active.

Stay proactive in managing your credit responsibly to ensure better loan opportunities in the future. If you need expert guidance to get a home loan, Credit Dharma can assist you. Our experts provide personalised advice to help you secure the best loan terms.

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Frequently Asked Questions