Thursday, July 11, 2024
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HomeFinancial ValuationPlanning to Pay Only the Minimum Amount Due on Your Credit Card?

Planning to Pay Only the Minimum Amount Due on Your Credit Card?

If you are consistently struggling to pay the full amount and can only manage the Minimum Due, it's essential to cut expenses and promptly revise your budget.

Just received your first-ever credit card, and the first bill has been generated, but you don’t have enough money to pay all my credit card dues. Planning to pay the minimum amount due? Then this article is for you. Here, you will gain insight into whether it’s a trap or a good step to opt for paying the minimum due amount.

In the world of credit cards, the allure of the minimum payment can be tantalizing. It’s like a financial safety net, offering temporary relief from the burden of a hefty credit card bill. But as with many things that seem too good to be true, the minimum payment option comes with its own set of pros and cons let delve deeper into it.

What is the Minimum Amount Due?

The Minimum Amount Due (MAD) is the smallest payment that a credit cardholder must make to their credit card issuer by the due date of each billing cycle to keep their account in good standing. This amount is determined by the credit card company and is usually calculated as a percentage of the total outstanding balance. Paying the Minimum Amount Due allows the cardholder to avoid late fees and maintain their credit score, as it shows that they are making at least the minimum required payment on time.

Advantages of Paying the Minimum Amount Due

Temporary Relief: Paying the minimum allows you to free up some cash flow in the short term, which can be useful if you’re experiencing a temporary financial strain.

Maintaining Credit Score: Making at least the minimum payment on time helps maintain your credit score by preventing late payments from being reported to credit bureaus. Consistent payment history is a crucial factor in determining your credit score.

Avoiding Late Fees or Penalty: Paying the minimum payment ensures that you meet the minimum requirement set by the credit card issuer, thus avoiding late payment fees and any penalty by your credit card company. Late fees can be hefty and can add to your debt burden significantly when the outstanding amount is bigger.

Disadvantages of Paying the Minimum Amount Due

While paying the minimum amount due on a credit card can provide temporary relief, it’s crucial to understand the risks associated with this practice. Paying just the minimum due can lead to several financial challenges:

Increased interest charges: One of the most significant risks is the accumulation of interest. Credit cards generally have high interest rates, and by paying only the minimum, most of your payment goes towards the interest rather than reducing the principal amount. Over time, this can result in you paying much more than the original amount borrowed.

Extended debt period: When you pay just the credit card minimum amount due, you are essentially extending the period it takes to pay off your debt. This prolonged debt can become a long-term financial burden, making achieving your other financial goals difficult.

Higher credit utilization ratio: Continuously carrying a high balance on your credit card increases your credit utilization ratio, which is a key factor in determining your credit score. A high credit utilization ratio can negatively impact your credit score.

Reduced creditworthiness: If your debt continues to grow over time, it can affect your creditworthiness. Lenders and financial institutions may view you as a high-risk borrower, which can make it difficult to obtain loans or other credit lines in the future.

What happens if you pay only the Minimum Amount Due for a long time?

Paying only the minimum amount due on your credit card can have significant drawbacks. It results in high-interest charges on the remaining balance, eliminates the interest-free credit period for new purchases, and may lead to a reduction in your credit limit. While it may offer short-term relief, it’s important to prioritize paying more than the minimum to avoid these long-term financial consequences.

Should you continue to pay only the Minimum Amount Due every month?

Certainly, you have the option to maintain your credit card’s active status by consistently paying only the Minimum Amount Due each month. However, it’s important to note that this approach comes with its drawbacks. You’ll incur high-interest charges and forfeit any interest-free credit period. It’s essential to understand that the less you pay toward your outstanding balance, the more you’ll end up paying in interest. Credit card debts can be financially burdensome, and it’s advisable to strive to settle your credit card balance in full whenever possible. In situations of financial emergencies or temporary cash flow constraints, opting to pay only the Minimum Amount Due can be a viable short-term solution. This helps you avoid negative impacts on your credit score and any associated late payment fees. Nonetheless, it’s crucial to recognise that relying solely on paying the minimum can only serve as a temporary arrangement.

Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. 
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