Why opting to pay only the minimum required payment on your credit card isn’t a wise decision.

When you receive your monthly credit card statement, it prominently displays two crucial figures: the total outstanding balance and the minimum amount due. While it is ideal to pay off the total outstanding balance in full, credit card providers understand that some individuals may struggle to do so each month, and thus, they require them to at least meet the minimum amount due in order to maintain an active account.

Let’s delve into the specifics of what this minimum amount due signifies and whether it serves as a helpful or detrimental financial practice.

The minimum amount due on your credit card represents the smallest sum you must pay on or before the due date, constituting a modest portion of the total outstanding balance.

Typically, the minimum amount due is calculated at around 5% of the total outstanding balance on your credit card. However, it may be higher under certain circumstances such as:

• If you’ve made a purchase on an Equated Monthly Installment (EMI) plan using your credit card.
• If you’ve exceeded your credit limit during the billing cycle.
• If you’ve failed to clear your outstanding balance from the previous month, as the unpaid amount is added to the current month’s minimum due amount.

How is the minimum amount due on your credit card calculated?

Most credit card companies determine the minimum amount due by setting it at 5% of the total outstanding balance as of the statement generation date.

What are the benefits of making only the minimum required payment on your credit card?Opting for the minimum payment offers several advantages:

• Avoiding late payment fees.
• Easier financial management during times of crisis.
• Keeping your account active and preventing irregular account reports to credit card companies.
• No negative impact on your credit score.

However, despite these apparent advantages, why do most financial experts strongly recommend paying the total outstanding balance instead of settling for the minimum payment? Let’s explore this topic further.

Why Paying Only the Minimum Due on Your Credit Card Isn’t a Wise Strategy?

If you believe that consistently making minimum monthly payments will lead to the eventual elimination of your credit card debt, you may be mistaken.

The reality is that while minimum payments may reduce the outstanding balance for the current month, they are insufficient to effectively pay down your debt. Even if you commit to refraining from additional purchases until you clear your existing balance, continuing to make only minimum payments will not reduce your debt. In fact, it may grow over time.

This is due to the nature of credit cards as revolving lines of credit, where interest accrues daily on your outstanding balance. Without effective management, you could easily and unknowingly fall into a cycle of debt accumulation.

If you consistently fail to settle the entire outstanding balance, both the existing balance and any new purchases accumulate, and interest is applied to the new total outstanding. Essentially, if you persist in paying only the minimum amount due, you forfeit the benefit of an interest-free grace period.