CREDIT CARDS – A TRAP CALLED MINIMUM DUE PAYMENT

Credit card usage is in India is in increasing trend over the years. The plastic money offers vide range of facilities and comfort apart from avoiding the risk of carrying money in hand. Credit cards if used wisely can aid you manage your finances effectively. But on the other hand, the usage of credit cards without knowing the implications of the same will end you up in greater trouble.

One of the options offered by the Credit card companies to its card holders is the scheme of payment of “Minimum due amount”. The credit card companies fix a minimum sum that needs to be paid in a month in order to maintain the good status of the Credit Cards. For example, the minimum payment due will be 5% of the total amount due (or) Rs. 500/- whichever is higher. Assuming that there is an outstanding in the Credit card amounting to Rs. 20000/-, it will be enough if the credit card holder pays only Rs. 500/- to maintain the good standing of the credit card account. It looks very simple and very easy for the credit card holders. Many credit card holders presume that by payment of the minimum payment due, the entire outstanding can be cleared in a mater of 20 months (20 months x 5% of outstanding = 100% of outstanding). But the reality is not known by many of the credit card holders. Unknowingly, may card holders choose to pay the minimum amount due and at one point of time, unable to make the payment due, gets into the debt trap. Getting caught in a debt trap will be a worst situation and the credit worthiness of the the card holders will so be in stake. This will also lead to deactivation of the credit card and a bad credit rating in the CIBIL report, which is likely to affect the future borrowings of the credit card holder.

The following table explains the real situation :-

Credit card outstanding Amount   :-       Rs.20000/-

Minimum Amount due                 :-       5% of the outstanding ,  minimum of Rs.500/-

Rate of Interest                          :-       3.35% per month

The perusal of the above table reveals the following :-

1)     It will take 90 months (7 ½ Years) to clear the outstanding amount.

2)     The total amount paid in these periods work out to 56815/- which is more than double the amount borrowed.

3)     If in any any of the months, if the minimum amount due is not paid, the card holder has to pay additional fees and penal charges.

4)     It is assumed that the credit card holder does not make any further purchases in the credit card. If there are any additional purchases during the month, the minimum due amount and interest payout will be much higher.

How to come out of this situation :-

1)     Credit card is not an alternative for money. Consider it as another form of money. Hence, use it only when you have it (ie., have cash balance).

2)     Due to unavoidable circumstances, if you are not able to pay the entire credit card outstanding, try to convert the big purchases into EMIs , if the rate of interest on EMI is less than the rate of interest on credit card outstanding.

3)     If possible, go for either personal loan (or) Jewel loan and close the entire outstanding and start paying the personal loan / Jewel Loan in EMIs. This will considerably reduce the Interest burden and you will be out of the debt much earlier than the tenure if you pay through the minimum due method.

4)     Last but not the least, use the credit card only when it is absolutely necessary.

Instead of getting into the trap and then blaming the Credit card companies, let us use the credit cards wisely and reap the benefits the plastic money offers.