Why Paying Credit Card ‘Minimum Payment Due’ Is a Bad Idea

You just received your credit card statement. Your cash flows for the month are already stretched. You realize that you won’t be able to make full payment towards your credit card dues. You are aware that the interest on credit card debt (or unpaid amount) is extremely high. You stumble upon an item Minimum Amount Due in your credit card statement? It is a small fraction of the total outstanding amount. You are wondering what Minimum Amount Due (MAD) means? Does it mean you will not be charged any interest if you pay the Minimum Amount Due? What if you do not even pay the Minimum Amount Due? Let’s find out everything you need to know about Minimum Amount Due.



How Does Paying Minimum Amount Due Help?

Minimum Amount Due is the minimum amount that you need to pay to the bank/credit card company by the due date to keep your account regular and avoid payment of any late payment fees.

Payment of minimum amount due ensures that you get away with paying only the interest. There will be no late payment or other finance charges applicable. Additionally, if you keep the account regular by paying MAD by the due date, the bank will not report your account as irregular to the credit bureaus. If your credit card account is reported irregular, your credit history/score will be adversely affected. This can be a problem if you are planning to take a loan in the near future.

By paying the minimum amount due, you cannot avoid interest on the unpaid amount.

How Is Minimum Amount Due Calculated?

Minimum Amount Due is typically 5% of the balance outstanding on the statement date. If you have opted for EMI balance transfer or purchase on EMI, that amount will also be added to your Minimum Amount Due. Any unpaid Minimum Amount from previous statement will be added to your current minimum amount due to arrive at total Minimum Amount due.

For the rest of this post, let’s assume the following:

  • Credit card is generated on 5th of every month
  • The payment has to be made by 26th of every month
  • Interest will charged at 3% per month
  • Late payment fees of Rs 500

Illustration

Let’s try to understand the calculation with the help of an example.

DateTransactionAmountRemark
June 15Purchase10,000You get interest free period.
July 5Statement10,000Due date July 26. Minimum Amount Due: 500

(5% of Rs 10,000)

July 20Payment500Payment for only Minimum Amount Due (MAD)
July 25Purchase15,000No interest free credit period
August 5Interest682Calculation shown below
August 5Service Tax95Service tax on interest
August 5Statement25,278Minimum Amount Due: Rs 1,263.40
August 26No payment (not even minimum amount due made by August 26). Hence, late payment fee will be applicable
August 30Late payment fee684Late payment fee: Rs 600 Service Tax: Rs 84. Typically charged after 3-5 days from due date if MAD not paid
September 5Interest778Calculation shown below
September 5Service Tax109Service tax on interest
September 5Statement26,848Statement Amount (25,268) + Late payment fees (684) + Interest (777) + Service Tax (109)Minimum Amount Due: Rs 1,263.4 + (Rs 26,838 – Rs 1,263.4)*5% = Rs 2,542
Interest Breakup for August StatementAmount
Interest on Rs 10,000 from June 15 to July 19345.2
Interest on Rs 9,500 from July 20 to August 5159.3
Interest on Rs 15,000 from July 25 to August 5177.5
Total682.0
Interest Breakup for September StatementAmount
Interest on Rs 25,278 from August 6 to September 5772.9
Interest on Service Tax from August 30 to September 54.7
Total777.6

You can see late payment fee was not charged in July since you had paid the minimum amount. However, the interest has been charged on the unpaid amount from the date of purchase (and not from statement date or due date). So, you are not avoiding high interest cost by making the minimum payment.

In August, since you didn’t make the minimum payment, late payment fees was charged.

No Interest Free Credit Period If You Only Pay the Minimum Amount Due

If you are making regular and full payment to your credit card account, you can get interest free credit for up to 52 days. You will get up to 21 days to settle after your credit card statement date to clear the outstanding amount.  Interest free credit period/grace period may vary across banks/credit card companies.

For your purchases made between August 6 and September 5, the payment due date will be September 26. So, for the purchase made on August 5, you will have to pay the dues on or before September 25, 2015. This gives you a maximum period of 52 days to settle the dues. Of course, if you make the purchase later, you will lesser number of days to settle the dues.

Purchase DateInterest free credit period on purchase
August 6, 201552 days
August 30, 201526 days

However, if you have not made the full payment and paid only Minimum Amount Due to keep your credit card account regular, you will not get any interest free credit period. You will be charged interest from the date of purchase. In the above example, if you had not made the full payment as per your previous statement, you will be charged interest from the date of purchase till the date of payment.

Therefore, in statement issued on September 5, you will be charged interest for 7 days on the purchase made on August 30. You will continue to be charged interest on this purchase till such time you settle the dues for this purchase. So, you might have succeeded in keeping your credit card account regular by paying Minimum Amount Due and avoided any late payment fees. However, there is no interest free period.

Let’s try to assess the impact through an illustration.

How Is Interest Charged on Credit Cards?

The assumption will be the same as described earlier. Minimum Amount Due will be paid every month to avoid late payment fees. There will be fresh purchases every month.

DateTransactionAmountRemark
June 15Purchase5,000You get interest free period.
June 30Purchase5,000You get interest free period.
July 5Statement10,000Due date July 26. Minimum Amount Due: 500 (5% of Total Outstanding)
July 8Purchase8,000You get interest free period.
July 20Payment10,000Full payment
July 25Purchase15,000You get interest free period.
August 5Statement23,000For purchases made on July 8 and July 25. Due date: August 4 Minimum Amount Due: 1,150
August 12Purchase10,000You get interest free period.
August 26Payment1,150Paid only Minimum Amount Due. Credit free period for purchase on July 8, July 25 and August 12 will be reversed. Interest will be charged from the date of purchase
August 30Purchase5,000No interest free credit period
September 5Interest1,679Interest charged from the date of purchase. Detailed breakup of interest amount provided below
September 5Service Tax235Service Tax on Interest
September 5Statement38,764Statement Amount (23,000) – Payment (1,150) + Fresh Purchases (15,000) + Interest (1,679) + Service Tax (235)

Breakup of Interest Calculation

Interest BreakupAmount
Interest on Rs 8,000 from July 8 to August 25386.6
Interest on Rs 6,850 from August 26 to  September 574.3
Interest on Rs 15,000 from July 25 to September 5636.2
Interest on Rs 10,000 from August 12 to September 5236.7
Interest on Rs 5,000 from August 30 to September 5345.2
Total1,679.0

You can see that for the purchase made on July 8, there was no interest charged in statement dated August 5. However, since you paid only the minimum payment due, the interest free credit period given was reversed and you were charged interest in the September statement from the date of purchase i.e. July 8.

What Happens If You Keep Paying Just the Minimum Amount Due?

Yes, you have to bear high interest cost and there will be no interest free credit period.  You will avoid late payment fees and adverse reporting to credit bureaus. But how long will it take to settle the dues?

Let’s continue with the same assumptions made earlier.

Suppose you make a single purchase of Rs 10,000 in this month. You made this purchase on the first day of your credit statement cycle. You choose to minimum payment due every month. Additional, you do not make any additional purchases for any future months. Let’s see how long it will take you to repay the debt if you keep paying just the minimum amount due every month.

Minimum Payment PolicyTime taken to repay debtTotal Amount paid (Rs.)Total Interest Paid
Rs 500 or MAD, whichever is higher36 months17,665.47,665.4
Rs 100 or MAD, whichever is higher130 months28,074.318,074.3
Rs 250 or MAD, whichever is higher77 months24,391.914,491.9
Rs 750 or MAD, whichever is higher19 months14,250.04,250.0
Rs 1,000 or MAD, whichever is higher13 months13,000.03,000

You can see you need to retire you credit card debt soon. Payment of just the minimum amount due will not control your interest cost. The less you pay, the more interest you have to bear.

Conclusion

Credit card debt is the most expensive debt in the financial sector. You should always strive to make credit card payments in full. Payment of Minimum Amount Due can be an option for short term cash flow crisis. You do avoid late payment fees and adverse reporting to credit bureaus by making the minimum payment. However, this can only be a short term arrangement.

We have already seen how long it will take to settle the dues if you keep making the minimum payment. If you are in such a crisis, you need to revisit your cash flows and cut down on few expenses, if required. If that does not work, you can talk to your friends/family to lend a helping hand. Alternatively, you can explore ways to reduce interest cost through personal loans or credit card balance transfers.



7 responses to “Why Paying Credit Card ‘Minimum Payment Due’ Is a Bad Idea

  1. First of all, thanks for sharing such an insightful article on credit card workings. Usually we see all numbers being thrown around, but no one is able to properly list down the calculations how credit card charges work.

    I do have a doubt though. In your first example, for Purchase on July 25 – You mentioned ‘No interest free period’. What if the customer makes the entire payment on July 26 (due date)? Then there will be interest free period applicable for the July 25 purchase right?

    I can see you wrote that with the assumption that customer will not pay, but just want to confirm this point.

    1. yeah, he only considered the scenario where customer not making the full payment.
      So overall summary (to my understanding ) would be… if you don’t pay full amount all your outstanding amount after the due date will run along with their interest from date of purchase.
      a)And you get interests, Service taxes if you keep paying only the MAD (or any thing less than full payment ??)
      b)And all the above + interests on service taxes + late payment fee + problems with future loans

      in both a & b the engine keeps running unless the outstanding amount at one point becomes Zero.

  2. my bill is 6890, 1498 is Minimum due payment. Paid 3400. What is my interest free period. Bill generation on 17th. due date 6th. I’m paying regularly full payment. This time I’m unable to do due financial issue. I’ve 32000 on smart emi. HDFC Card

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