How Credit Card Minimum Due Amount Is Calculated: Whenever our credit card statement (Credit Card Statement) comes, on which date, where and how much we spent with a credit card, all of them are accounted for. It is also mentioned in the statement how much we have to pay to the credit card company. We can pay this amount in three ways-
Full Payment: Pay the amount mentioned in the statement on or before the due date.
EMI Conversion: If the amount is very high then we can pay it by dividing it into Equated Monthly Installment. The thing to note here is that even before the credit card statement is prepared, the credit card company has to be informed that you want to pay by opting for monthly instalments. EMI conversion is difficult in the month after the statement is generated.
Minimum Due Amount: If we are not able to pay the full amount and we have not divided our bill in monthly instalments, then also we have the option of MDA to avoid late payment. Even if we pay 5% of our total outstanding amount every month, we will not be penalized and our credit score will not get affected.
How is the minimum balance determined?
The minimum balance amount is determined by adding these amounts-
5% of the total outstanding amount
If you have divided your payment in EMI, then the amount
past credit card dues
By adding these three, the minimum due amount of the month is decided. In any case, you will have to pay at least this amount.
Benefits of paying the minimum balance
Your credit card will remain active. You can use it up to the remaining credit limit.
You will not be charged a late payment penalty
Your credit score will not suffer as the bank will not consider you a "defaulter" if you pay this amount.
Disadvantages of paying the minimum balance
If you do not pay the full amount every month and pay only the minimum due amount, then you can suffer many financial losses-
The next month's burden will increase: The balance amount will be added to the next month's statement for the month in which you paid only the minimum due amount.
You will not get the benefit of credit free period: If you use a credit card for anything, then a credit-free period is given to returning that amount to the bank. That is, even if you do not return that amount to the bank for a fixed period, then you will not have to pay interest. But in the case of the minimum outstanding amount, you will also have to pay interest on the outstanding amount because next month you will not be able to get the benefit of credit pre-period on that amount.
The debt trap will keep on increasing: If you keep paying only the minimum amount due every month, then the total amount due will increase month after month. Along with this, interest and tax will also increase on it, which will increase the financial burden on you.
Reduction in Credit Limit: As the outstanding balance increases, your card limit will also reduce. So if there is an emergency in future and you have spent more than the credit limit, then the penalty imposed on it will also increase your financial burden.
Therefore, whenever you make a payment with a credit card, keep in mind that you will be able to return that amount to the bank comfortably next month. Also, try to opt for the minimum balance option only occasionally and make the full payment every month as much as possible.