The number of people that own a credit card is growing at a phenomenal pace. One of the important reasons behind this development is the growing awareness. Most people are afraid to apply for a credit card because they believe it will lead to a debt trap. This is not true at all if you are punctual with your bill payments.
Credit cards should be used prudently and only for things that you can afford. It should not be treated as a cash reserve. Using a credit card diligently can improve your credit score. One can also use credit cards for purchasing high-ticket items with the EMI option.
However, you must keep a check on your credit card bill and learn how your billing cycle works. Read on to know more about the credit card minimum payment and common myths associated with the same.
What is the credit card minimum payment?
The credit card minimum payment is a fraction of the total outstanding amount that you are required to pay. The total outstanding amount is calculated as a sum of all your purchases, interest fee and late payment charges due for a particular cycle. Credit card bills are prepared in cycles.
Most cycles follow a 30-day duration and then a credit card statement is generated. This statement includes all important details related to your billing. The credit card minimum payment is usually calculated as 5% of the total outstanding balance amount.
Suppose that your outstanding balance amount is INR 10,000, then your minimum due amount will be 5% of 10,000, i.e., 500. Paying the minimum balance can help you avoid late payment charges and keep you on the right track.
Minimum payment myths related to credit cards
There are many myths associated with credit card minimum payments. These misconceptions often deter people from applying for a credit card. Some myths also lead to a poor credit score, as people are not fully aware of the implications. Here are some of the most common myths related to credit card minimum payment dues.
1. Paying off the minimum due amount is enough
One of the most common myths that people have for the minimum due amount is that paying it off will be sufficient to meet contractual obligations. Paying off the minimum due amount is a must. However, this will not get you out of the debt incurred on account of credit card payments. The minimum due amount is only a small fraction, usually up to 5% of the total outstanding amount.
Paying this will only help to avoid the late payment charges. However, you will have to bear additional interest payments on account of the pending balance. You must understand that the interest rate charged on a credit card is quite high. Not paying your bills on time can add to your financial burden.
2. Paying off the minimum due amount will help you avoid charges
Paying off the minimum due amount will indeed help avoid some charges, but there are plenty of other hidden costs associated with this. The remaining balance after deducting the minimum due amount will accrue interest charges. The interest rate charged on credit cards is quite high. It is between 2% to 4% per month.
Besides this, when you have an unpaid balance on your credit card, you will not get the interest-free period (grace period) for new purchases. This can add to your total interest charges and can increase the debt amount considerably.
3. The minimum balance due can only be paid once monthly
Another common myth among new and first-time credit card users is that the minimum monthly balance due can only be paid once each month. This is far from the truth. The minimum due amount can be paid in multiple instalments before the due date. It doesn’t require paying off the entire amount at once.
You can choose to pay small fractions of this amount. The only thing you should be mindful of is the due date. The total minimum payment due must be paid before the due date. For example, let’s assume that the minimum payment due is INR 10,000 and the due date is 1st April. You can choose to pay this entire amount in multiple attempts before 1st April.
4. There is no grace period for the minimum due amount
Many people are unaware of the concept of the grace period. This includes both new and old credit card users. The grace period can be defined as the period between the end of your credit cycle and the due date of your payment. This is an interest-free period that provides users with the flexibility to make the payment before the due date with no interest charges. Users have a grace period of 20 days, after which they are required to pay the minimum due amount.