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Never ever 'revolve' on your credit card by paying minimum

Minimum payment, maximum trouble

Basha Shaikh

18 Sep 2008

In difficult times when you are short of means to pay for your credit card bills, paying minimum would give you a breather. Though it may not save you from finding a concrete solution for paying your credit card debt. And soon you may be under a debt trap. On the contrary assuming that paying minimum is a good option, is like digging your own grave. If you are not aware of this or are confused by credit card jargon, don't worry you are not alone. Revolving and minimum payment are the key terms to be learnt. Let's have better understanding of the same

Revolving credit and minimum payment

Revolving credit means once you get a credit limit then you can use it as long as it stays, within the present credit limit. It is required that each month you pay the minimum amount which also includes the interest charges. As your balance gets reduced, your funds increase and are available for you to use, up to your credit limit. For instance, if your credit limit is Rs.15000 and you have made a purchase of worth Rs. 10000, you'll have Rs.5000 for future purchases. Know if you make a minimum payment which is normally 5% i.e. Rs. 500, you'll have Rs. 9500 available credit.

If you go on paying minimum then it take years to cover your due amount. As it contains a large portion of interest component and a tiny portion of the balance amount. Always make payment before the due date. It will help you to chip away your due amount without paying any interest on it. If you think that paying minimum is more convenient option, then banks are even happier!

Here is why?

Let us understand this with the help of the table given below:

Assume scenario, X has made purchase worth Rs. 100000, Minimum amount due - 5%, Revolving interest rate 3.1 monthly (41.79% p.a. including service tax)

No. of months

Outstanding

Payment

Interest

Total C/f

1

100,000

5,000

3,483

98,483

2

98,483

4,924

3,430

96,989

3

96,989

4,849

3,378

95,518

4

95,518

4,776

3,327

94,069

5

94,069

4,703

3,277

92,642

6

92,642

4,632

3,227

91,237

7

91,237

4,562

3,178

89,853

8

89,853

4,493

3,130

88,490

9

88,490

4,425

3,082

87,148

10

87,148

4,357

3,036

85,826

11

85,826

4,291

2,989

84,524

12

84,524

4,226

2,944

83,242


From the above illustration, we conclude the following:

1) If you pay minimum for the entire year, you may end paying more than 50% of the amount due.

2) Even after paying 50% of the due amount 83.24% of amount is still due. .

3) After paying 50% of the due amount you end paying only 16.75%.

4) Do you know if you further calculate how many months it would take to your principal to reach your minimum of Rs. 5000? It takes 196 months i.e. 16 years. I repeat it takes 16 years to just reach the minimum amount of an outstanding of Rs 100000. By this time you would have already paid Rs. 313.14% i.e. Rs. 313148 instead of paying your due amount of just Rs. 100000.

So you understand that what a big trouble you are inviting by opting to pay minimum. In the short term, it will look like a most viable solution but in the long run it will be monstrous. Avoid paying minimum and try to clear your credit card dues even before the due date.