💳 All credit card users must have seen the "Minimum Amount Due" line in your monthly statements. This is the minimum amount that you have to pay in order to keep a good standing with the credit card company. This is merely a percentage of the total dues for the month (generally around 5%) and can change from month to month as per your expenditures.
If you feel that you can get away with paying just the minimum amount and not face any penalties — you are grossly mistaken! You have fallen for the "minimum dues trap".
How Credit Card Interest Works
To know the dangers of paying only the minimum dues, you need to understand how interest is charged by credit card companies. There are 3 aspects you must remember:
1. Interest Rate
If you study your card, the monthly interest charged is around 3–4%. That may not seem much, but annualized, this balloons to 36–48% per year. Yes, you read that right!
2. Compounding of Interest
This interest generally compounds daily for most credit cards! Those who understand the magic of compounding will now think twice before defaulting on credit cards - just like your investments compound to make you fantastic returns, the penalty interest charges on your credit card can give you big shocks if gone unchecked.
3. Interest-Free Period
Generally, you get a 30–50 day interest-free period when you have a credit card. However, you do not get any interest-free period when you have an outstanding due. So when you pay only the minimum dues, any new expense done in the next month will not get an interest-free period, and will start accruing daily compounding interest immediately.
There are people who have no knowledge of how credit card interest charges are applied and who keep clearing the minimum dues for months. Finally, the total dues build up into monstrous amounts — many, many times the total spends — purely due to interest charges. People cannot even get personal loans to clear these credit card dues as the credit score is damaged beyond repair. In such cases, people often end up borrowing from family and friends to clear dues.
How Do You Avoid Falling in a Credit Trap?
Here are some simple strategies to use your credit card wisely:
- ✅ Reverse-calculate the maximum EMIs that you can manage with your income. Keep your monthly credit card spends within this limit.
- ✅ Avoid impulse purchases.
- ✅ Use co-branded cards or cashback cards for unavoidable spends.
- ✅ Example: Office-goers who spend monthly on petrol should use cards tied up with petrol stations for rewards and benefits.
- ✅ For official travel and accommodation that gets reimbursed later, use credit cards to benefit from the 30-day buffer (but remember to claim reimbursements promptly).
- ✅ Set low credit limits for your cards.
- ✅ Do not get too many credit cards.
- ✅ Lastly, always pay the full dues on time.
📌 Related Reading
Why Building an Emergency Fund is as Important as Insurance
How Inflation Eats into Your Savings
Frequently Asked Questions
Q. What happens if I pay only the minimum due on my credit card?
A. You avoid late payment fees, but you will still be charged interest on the remaining balance — which compounds daily.
Q. Is credit card interest really 40% annually?
A. Yes. Monthly rates of 3–3.5% annualize to 36–45%. Always check your card’s APR (Annual Percentage Rate).
Q. How can I avoid paying interest on my credit card?
A. Always pay the full outstanding balance before the due date. This way, you continue to enjoy the interest-free period.
📌 Final Note
Credit cards are powerful tools if used wisely. They can build your credit score, provide rewards, and help manage short-term liquidity. But if misused, they can quickly trap you in debt. It is crucial that you manage credit responsibly, be aware of your spending limits and stick with them.
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