Table of contents
1.)Understanding ‘Minimum Amount Due in Credit Card’
2.)Americans Owe Almost $900 Billion in Card Debt
3.)Credit Card Usage – Unanswered Questions
4.)What is the Credit Card Billing Cycle?
5.)Total Amount Due & Minimum Amount Due – What is it?
6.)The Allure of Revolving Credit!
7.)Revolving credit vs. Installment credit
8.)Credit Card Interest Rates & Revolving Credit – A Tale of Two Evils that Lead to a Debt Trap.
9.)How do banks trap you in the Minimum Amount Due on Credit Cards?
10.)StepsHow to escape from the “Credit Card Debt Trap”
11.)Change in Perspective
Shiva got his first Credit Card immediately after getting his first job in a software firm, like many Indian youngsters he was using the Credit Card carelessly.
He was not paying the Credit Card bills on time because he was sure that his job is secure. But, what if he lost his job?
Sadly, it happened!
In the 2008 global crisis, he lost his job.
But he continued using his Credit Card by using the ‘boon’ called the ‘minimum amount due’.
1. Understanding ‘Minimum Amount Due in Credit Card’
The minimum amount due on Credit Card is an amount decided by the card issuing bank. If you pay at least this amount on the Credit Card, you will not be treated as a defaulter and can use the Credit Card in the future also. If you don’t make even this payment, there will be other charges like late payment fees, etc.
What happened next to Shiva?
His Credit Card bill started seeing big amounts which exceeded his credit limit and the Card was blocked by the issuing bank.
Now he is in a good job, but his home loan application was rejected by another bank, because of his poor Credit Score in CIBIL.
Now he started thinking whether the ‘minimum amount due’ is actually a boon. Shiva is not alone. Many Credit Card users are getting into the Credit Card debt trap.
2. Americans Owe Almost $900 Billion in Card Debt
Can you believe it? According to the New York Fed blog article, American consumers owe $893 billion on credit card debt, leaving approximately $3 trillion in unutilized card credit.
This is the figures from the most advanced country in the world. People are moving towards credit cards for short-term convenience but what about long-term peace of mind?
Maybe some of them are not aware of the payment conditions and the way the interest is charged on Credit Cards.
Credit Card companies will not disclose the real dangers while selling these Cards.
But Please! Always remember that it is your responsibility to be “Credit Card Smart” to avoid pitfalls.
3. Credit Card Usage – Unanswered Questions
People buy credit cards without pondering over many important questions such as,
What is the Total Amount due on the Credit & The minimum amount due on the Credit Card? How do Credit Card interest rates eat away at your savings? How does the minimum amount due on Credit Card work? What is the difference between Credit Card Minimum Payment Vs Full Payment?
We will try to answer all these questions below.
4. What is the Credit Card Billing Cycle?
The Credit Card Billing Cycle is the period for which you are liable to pay the dues with a Credit Card. Let us assume that your billing cycle is from 5th April to 4th May and the due date for payment is 25th May.
In this case, your monthly bill will be generated on the 4th of every month. The monthly bill will contain all your transactions on the Credit Card for the billing period from 5th April to 4th May.
If you used the Credit Card for Rs. 10,000 on the 6th of April, you have to pay that amount only on the 25th of May. You are getting an interest-free credit of around 49 days!
5. Total Amount Due & Minimum Amount Due – What is it?
If your Total Amount Due in a billing cycle is Rs. 15,000 and the due date is 25th May, your Credit Card statement will contain one more option which is called Minimum Amount Due.
Normally, the Minimum Amount Due on a Credit Card will be a small fraction of the Total Amount Due.
But, It will be around 5% of the total amount due in most cases. In the above example, it will be Rs. 750 (5% of the total amount due of Rs. 15,000).
You can either pay the total amount due of Rs. 15,000 on or before the due date of 25th May or pay at least Rs. 750, which is the Minimum Amount due on Credit Card.
6. The Allure of Revolving Credit!
“Procrastination is like a credit card: it’s a lot of fun until you get the bill”.
If you pay only the Minimum Amount Due, then the unpaid amount is carried forward to the next billing cycle, and so on.
In other words,
“You won’t be charged interest on the total credit limit; only on the sum that is still owed”.
This is called Revolving Credit. Once you start using this, you are entering into a world of Credit Card debt trap!
7. Revolving credit vs. Installment credit
Two types of credit that operate differently are revolving credit and installment credit. Borrowers with revolving credit are permitted to use the borrowed funds up to a predetermined credit limit, pay it back, and then use it once again. When using installment credit, the borrower is given a single quantity of money that they must pay back over time in equal installments.
8. Credit Card Interest Rates & Revolving Credit – A Tale of Two Evils that Lead to a Debt Trap.
When you are paying 10% annual interest on a Home Loan, the annual interest rate on Credit Card will be, much higher in the range of 36% to 48% depending on the card.
When you are paying only the minimum amount due on your Credit Card, you feel like you are escaping from debt but what you forget to remember is that,
you will be charged interest at the above-high rate for the remaining balance brought forward in the next month.
Yes. But you will not get the interest-free credit anymore. For all new purchases, the bank will charge interest from the date of purchase. This will continue until you clear the total amount due on the card.
So, if you are unable to pay the total amount due, it’s better to stop using the Credit Card, till you clear all the total dues.
Will Revolving Credit Affect Your CIBIL Score?
Yes, when you are using revolving credit, it is a clear indicator of your weak financial position. This will affect your Credit Score and getting further credit in the future will be an issue like Shiva.
9. How do banks trap you in the Minimum Amount Due on Credit Cards?
“Banks will never ask you to pay the amount in full. They will always call you and ask how much you are going to pay”.
The reason behind this is the amount of interest charged on the Credit Card is too high.
While Personal Loan interest rates range between 11%-16%, bank charges as high as 36% on Credit Card delayed payments.
If you are paying only the minimum amount due on Credit Card, it is high time to understand the lurking danger behind this.
Because most banks do not inform their clients about the danger of paying the “minimum amount due on Credit Card“.
This is where the card issuing banks, whether it is HDFC Bank, ICICI Bank, or Axis Bank, make a lot of money when you pay the minimum amount due on a credit card.
10. Steps to Escape from the “Credit Card Debt Trap”
- Try to make the Credit Card payment in full. If you are unable to make the payment in full, try the following solutions:
- Take a loan from your friends, siblings, or your parents.
- If you have some investments, break it and pay the Credit Card due as it is the most expensive financial instrument if you do not pay on time.
- Many other loans are available at a lesser rate of interest in the market. You may avail of any such loans and utilize the amount to clear the Credit Card dues.
- A Personal Loan interest rate is cheaper than the interest rate on Credit Card. Take a personal loan from the bank at a lower interest rate.
- Try using a Credit Card balance transfer with some other credit card company.
- Start cutting your expenses and try to pay more.
- If nothing works, convert the due amount into the EMI option given by Credit Card Companies.
- Always beware of “Credit Card Traps” to optimize your Credit Card usage.
11. Change in Perspective
“Don’t cut up your credit cards, the problem is not the cards, it’s the lack of financial literacy of the person holding the cards and always making the best out of a bad situation.”-Robert T. Kiyosaki
Many people think that buying a credit card is not good because of the possibility of acquiring debt by swiping more than necessary.
But, if you think a little differently, this can also be a boon to improve your financial discipline, because you are constantly calculating how much you can or cannot afford in the future.
There is the constant threat of falling into a debt trap because of the option to spend whenever you want and take the Minimum Amount Due for convenience.
It is always advisable to think twice before making a decision that can not only affect you in the long run but also the people who are financially dependent on you.
Please do not make any drastic investment decisions just by surfing social media sites like Quora, Facebook, Twitter, etc a professional financial planner can guide you through a comprehensive financial plan avoiding all pitfalls.