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Catastrophic Minimum Amount Due in Credit Cards

Do you know, what is considered to be the best thing about credit cards?

Most people are happy with the fact, that there is no obligation or compulsion to clear your bills by the due date.

Just pay the "Minimum Amount Due" and carry forward your payment to the next month. And, repeat this process month after month.

Whether it is your telephone, electricity, grocery or any such bill, none offers this credit card type "rollover" facility.

Beware:

This "enjoy now pay later" strategy may appear to be a blessing for the shopaholics.

In reality, however, it could have devastating impact on your personal finances.

Why:

Let's understand this very carefully.


What is this Minimum Amount Due concept?

A credit card, as all know, works on a monthly basis.

All your purchases through the credit card, are recorded for a specified period of around 30 days (say from 15th Sept to 14th Oct). At the end of this specified period, a bill for the total amount spent by you is generated. And, you get typically about 15-20 days to make this payment (e.g 31st Oct being the due date).

But, what if you don't have sufficient money to clear this bill, on or before the due date?

Relax:

The bank gives you an option to rollover this outstanding bill amount to the next month; subject to two conditions:
1. You have to pay a Minimum Amount now, and
2. You will be charged an interest cost upon rollover.

The Minimum Amount Due is typically a nominal amount of 5% of the total bill amount (or Rs.100 if the 5% calculation works to less than Rs.100).

credit-card-minimum-amount-due
Shape of your personal finances, if you stick to Minimum Amount Due only.

Why is Minimum Amount Due so attractive?

Firstly, the immense relief in paying only around 5% of the total amount spent, is a pure bliss. Most of us are always running short of cash. Our desires are way beyond our incomes.

Secondly, next month again, you can rollover your outstanding amount to the 3rd month... by simply paying the Minimum Amount Due for the 2nd month. (Your 2nd month bill includes your carried forward balance + the purchases in the 2nd month + interest charges).

And you can continue doing this rollover, again and again and again.

Naturally, therefore, people find the concept of Minimum Amount Due so attractive.


Why is the 'rollover of balance' so destructive?

As mentioned earlier, this rollover is not free of cost.

If you had paid the bill by the due date, you wouldn't be charged anything extra. This, period from the date of purchase till the date of payment, is called the interest-free period.

But, once you decide to carry forward the amount due to future months, you are liable to pay the necessary interest charges.

It is this interest payable that has the potential to cause immense damage.

Why?

Because
a. The interest rate is a massive 30-50% per annum
b. The interest meter starts not from the due date, but from the date of original purchase
c. The interest is payable not only on the rollover amount, but also on ALL future purchases

Consequently, even on small amounts rolled over, the total interest cost works out to a pretty hefty amount.

By the way, assuming you rollover the balance of a particular month and thereafter don't use your credit card at all (i.e. there are no fresh purchases against the card), then
1. It would take you almost 18-20 years to clear your dues, if every month you keep paying only the Minimum Amount Due
2. Your total payment (i.e. original purchases + interest) would be about three times the original cost. In other words, you would end up paying double the amount spent as only the interest charges.

If you are careless enough to pay such exorbitant interest cost, you would naturally have no money left for the necessities. Your children's education, your family's healthcare expenses, your home loan EMIs, your retirement corpus... you are jeopardizing ALL THIS for nothing but brief moments of fun and frolic.

Definitely, not a smart thing to do!

So, think (thrice) before you pull out your credit card to splurge...

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