The following article is an initiative of BankBazaar.com and is intended to create awareness among the readers
December 22, 2017 / 05:25 PM IST
There is no denying the fact that credit cards have opened doors of financial freedom and ease for people around the world. Perhaps that is the reason why it is considered to be one of the most sought-after commercial products today. From a humble beginning in the 1930s, the market of credit cards has evolved over the years. Thanks to the ever-growing economy. Credit cards have completely transformed the purchasing habits of consumers. In contemporary economy, credit cards constitute a vital part of a business (domestic as well as international) and household. For individuals, credit cards have become an important part of daily life. Be it purchasing groceries or fuel, booking air tickets or hotel rooms, credit cards have made all this secure and convenient in terms of ease and payment. Apart from providing ease and convenience, credit cards also help in building an individual's credit history. They are not only significant for businesses and individuals; they form an important feature of economic growth.
However, paying credit card bills can get overwhelming sometimes. While some prefer to pay their outstanding balance at once, there are many who keep paying the minimum amount due on their card. In fact, they end up making it a habit. Although the minimum amount due is easier to settle, what we tend to forget is that doing that makes one pay much more what they are supposed to pay, in the long run. To make the most of a credit card, it is important to understand each and every feature associated with it. The minimum amount due is one of the most important features of a credit card. Let us take a look at what it is and how it is calculated.
By definition, the minimum amount is the percentage of the outstanding balance that is used to calculate the cardholder's minimum payment for the month. Banks in India generally charge 5% of the outstanding balance as the minimum amount due. If the cardholder converts their expenditure to EMI or if they use the EMI balance transfer option, the same calculation will be added to their minimum amount due. For instance, let us say that the cardholder has made a purchase of Rs.10,000 on July 15 and the due date is August 26, the minimum amount due will be Rs.500 (5% of the Rs.10,000).
Though minimum amount due is small and affordable, paying just that does not save one from the interest charged on their credit card expenses. Financial experts always advice cardholders to pay more than the minimum amount due. Listed below are 5 advantages of paying more than the minimum amount due.
- It helps one in keeping a good credit utilization ratio: To understand this point, it is important to understand what credit utilization ratio is. Simply put, credit utilization ratio is the amount of balance on one's credit card in comparison to the credit limit. It is important if the cardholder wants to maintain a good credit score. As one's credit utilization increases, their credit score falls. When the cardholder pays more than the minimum amount due, they shrink the margin between the outstanding balance and the credit limit. This helps them in keeping the credit utilization ratio in check.
- It helps one in building their credit score: Paying the just the minimum amount due lowers the outstanding balance by a small amount. It takes several months or even years to get rid of the debt. Mostly, the cardholder ends up not being able to use the credit card because the cardholder ends up overshooting the credit limit. This not only makes the credit card useless but it also affects the cardholder's credit score negatively. Hence, once the cardholder starts paying more than the minimum amount due, their credit score starts to become better and stronger.
- It will save one from paying interest: When one pays just the minimum amount due, they end up paying more. This is because they pay the interest rate which is pretty high. One can save hundreds, possibly thousands, if they pay more than the minimum amount due. Interest rates levied by banks on credit cards are usually high. Paying it continuously for several months is expensive. Paying more than just the minimum amount due will save one from paying high-interest rates.
- It helps one in paying off the debt sooner: When one pays just the minimum amount due, they pay a meagre amount towards the principal outstanding every month. This keeps the cardholder in debt for a longer time. This also leads to the cardholder paying interest for a longer period of time. Ultimately the cardholder ends up paying much more than they are supposed to pay. Paying more than the minimum amount due helps one in paying off the debt sooner.
- It helps one in getting loans easily in future: Being in the good books of the banks is necessary. A bad credit score makes it difficult to avail a loan from a bank. When one continues to pay just the minimum amount due, the banks look at them as a bad risk. Most banks hesitate to give loans to bad risks. Also, when they do sanction a loan, they charge a high interest. Paying more than the minimum amount due on a credit card will mean that the cardholder is eager to settle the debt. This will make it easier for the cardholder to avail loans from banks during their time of crisis.
To enjoy the benefits of a credit card, it is important to maintain it properly. Paying more than the minimum amount due is an intelligent way to do it.
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