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Minimum Amount Due means Maximum Financial Destruction

Most of you would be using a credit card.

Most of you would be aware of its Minimum Amount Due option.


As per the same, there is no compulsion on you to clear the entire credit card bill amount, on or before the due date. You can pay only a nominal portion of the bill amount by the due date and carry forward the balance to next month. 


And icing on the cake... there is no need to repay the balance the next month. You can again pay the minimum amount due and carry forward the remaining balance to the 3rd month. And this can continue month after month, till the balance finally becomes zero.  

Generally, the Minimum Amount Due is fixed at 5% of the bill amount (or Rs.100 if the 5% calculation works to less than Rs.100). 


If you think that this is a "great" option, think again!

If you think that banks are being charitable, think again!

Were it a home loan, banks would get worried, very worried, if you missed even one EMI payment. But, in case of credit cards, banks would be happy so long as you pay only the minimum amount and carry forward the rest.


The plain and simple reason for this is the stupendous 30-50% p.a. interest payable on such outstanding credit card balances. Naturally, the option to carry forward balances is not free. Naturally, banks would be happy to earn such colossal rates. Naturally, it would be committing financial hara-kiri if you pay such high rates.


Let us consider an example, in case you are still toying with the idea to make only the minimum payments.  


Suppose you spend Rs.50,000 on your credit card. The annual interest rate applicable is 40% p.a. You pay only 5% of the balance (or Rs.100 whichever is higher) every month. Then,

> It would take you an unbelievable 19 years to clear your bill
> Apart from repaying Rs.50,000, you would ADDITIONALLY bear an unimaginable interest burden of about Rs.1 lakh.

So now you know why paying only the minimum amount due is akin to committing financial hara-kiri. It is the quickest way to bankruptcy.


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