Debt Never Ends by Paying Only Minimum Due on Credit Cards! Here’s How?
Last Updated : March 12, 2018, 12:55 p.m.
A credit card can be a priceless gift for shoppers who do not leave any opportunity to grab their favourite stuff both online and offline using the plastic money. The attractive cashback, discounts, movie vouchers and offers alike only drive one crazy about the cards that are in plenty to choose from. So, the shopping carnival kicks off. From laptops to trousers, you can add a lot to the cart and bring smiles among the sellers. Even you would smile buying your favourite stuff with a credit card.
But all that smile could vanish when you see a mounting credit card bill which often is the case with such massive shopping. Banks what they do, though, give a teaser of ‘Minimum Due’ and tempt many to fall into the debt trap. This eventually becomes a vicious cycle to keep your finances on the rocks. Here’s how minimum due payment on cards can wreak havoc on your finance.
What is Minimum Due and How It Dents Your Finance?
Minimum due is an amount calculated at about 5% of the outstanding balance in a particular billing cycle. Obviously, it’s going to be a lot lower than the total outstanding dues. Besides affordability, what also prompts one to go for minimum due payment is the fact that there are no late payment charges paying the same on time. But the damage that many fail to recognize is the addition of interest to the next billing cycle. Not only the interest adds to the bill, even the taxes are charged, making the debts grow out of proportion and creating an undesirable situation to deal with.
How Do Interest & Taxes Accrue on Minimum Due?
The interest can be charged at a higher rate of 3%-3.5% per month on credit card balance . When one pays only the minimum due, the interest is calculated on the outstanding balance. Want to see the formula that banks use to calculate interest on the balance overdue? It’s right there below.
Interest = [(Outstanding Balance x rate of interest per month x 12 x number of days)/365]/100
On the interest amount, the concerned lender will also debit 18% GST.
Let’s take the help of an example below to gauge the impact of interest and taxes.
Example – Ravi Sanyal shops via a credit card for his needs. In 2017, he shopped for most of his needs via his credit card. The date of statement generation and bill payment is 1st and 21st of every month. He kept paying minimum due every month on the due date. Assume the interest rate on his card to be 3.25% per month.
| Month | Transaction Amount (In ₹) | Minimum Due Paid (In ₹) | Interest (In ₹) | GST(In ₹) | Total Finance Charges (In ₹) | Total Due (In ₹) |
|---|---|---|---|---|---|---|
| January | 25000 | - | - | - | 25000 | |
| February | 10000 | 1250 | - | - | - | 35,000 (25,000 +10,000) |
| March | 8000 | 2151.49 | 1084.52 | 195.21 | 1279.73 | 43,029.73 (35,000+1,279.03+8,000-1,250) |
| April | 4000 | 2325.29 | 1379.31 | 248.28 | 1627.59 | 46,505.83 (43,029.73+4,000+1,627.59-2,151.49) |
| May | 4500 | 2519.05 | 1441.04 | 259.39 | 1700.43 | 50,380.97 (46,505.83+4,500+1,700.43-2,325.29) |
| June | 3000 | 2638.38 | 1614.95 | 290.69 | 1905.64 | 52,767.56 (50,380.97+3,000+1,905.64-2,519.05) |
| July | 4000 | 2802.93 | 1635.07 | 294.31 | 1929.38 | 56,058.56 (52,767.56+4,000+1,929.38-2,638.38) |
| August | 3000 | 2918.8 | 1796.95 | 323.45 | 2120.4 | 58,376.03 (56,058.56+3,000+2,120.40-2,802.93) |
| September | 4200 | 3093.26 | 1871.23 | 336.82 | 2208.05 | 61,865.28 (58,376.03+4,200+2,208.05-2,918.80) |
| October | 3700 | 3236.71 | 1916.98 | 345.06 | 2262.04 | 64,734.06 (61,865.28+3,700+2,262.04-3,093.26) |
| November | 2700 | 3332.3 | 2075.04 | 373.51 | 2448.55 | 66,645.90 (64,734.06+2,700+2,448.55-3,236.71) |
| December | 3200 | 3614.14 | 2065.11 | 371.72 | 2436.83 | 72,282.73 (66,645.90+3,200+2,436.83-3,332.30) |
Note – 18% Goods and Services Tax (GST) is charged over the interest accrued
Minimum due paid by Ravi = ₹29,882.35
Total outstanding left = ₹72,283.73
Month-Wise Calculation of Interest
| Month | Interest Amount (Approx.) |
|---|---|
| January | - |
| February | - |
| March | [(35,000 x 3.25 x 29 x 12)/365]/100 = ₹1,084.52 |
| April | [(43,029.73 x 3.25 x 30 x 12)/365]/100 = ₹1,379.31 |
| May | [(46,505.83 x 3.25 x 29 x 12)/365]/100 = ₹1,441.04 |
| June | [(50,380.97 x 3.25 x 30 x 12)/365]/100 = ₹1,614.95 |
| July | [(52,767.56 x 3.25 x 29 x 12)/365]/100 = ₹1,635.07 |
| August | [(56,058.56 x 3.25 x 30 x 12)/365]/100 = ₹1,796.95 |
| September | [(58,376.03 x 3.25 x 30 x 12)/365]/100 = ₹1,871.23 |
| October | [(61,865.28 x 3.25 x 29 x 12)/365]/100 = ₹1,916.98 |
| November | [(64,734.06 x 3.25 x 30 x 12)/365]/100 = ₹2,075.04 |
| December | [(66,645.90 x 3.25 x 29 x 12)/365]/100 = ₹2,065.11 |
So, you can see the size of debt enlarging by the month, making it difficult for Ravi to pay off the entire dues anytime soon. He may stop shopping seeing such a due amount. But even that won’t help much as interest and taxes will keep getting charged on the balance overdue. Not all is lost for Ravi, though, as he can use either his savings or take a personal loan to get rid of the burgeoning credit card debt. A personal loan comes at a much lower interest rate of 11%-25% in a year compared to 35%-42% of credit cards.
A credit card is a very good stuff to have in times of need. But you must know your spending limit to keep the bills under control. This will help you pay the dues in full and get free from interest and tax, much better than paying the minimum due and letting these charges to add to your bill month-on-month.
