look news india
As soon as the monthly credit card bill arrives, most banks display two prominent options in the statement – ’Total Amount Due’ and ‘Minimum Amount Due’ (MAD). When there is a shortage of cash in hand, it seems very easy to get relief by paying only 5% of the bill i.e. minimum due.
But this financial relief is just an illusion. Credit card companies provide the option of minimum due so that you are not charged ‘Late Payment Penalty’ and the card is not blocked. This has nothing to do with paying off debt or avoiding interest. If you keep paying only the minimum due every month on an outstanding bill of ₹1,00,000, you end up handing over a large portion of your hard-earned money to banks in the form of interest and GST instead of reducing the principal amount.
Generally the bank accounts for the total outstanding balance. 5% Or fix the minimum due at (Accrued Interest + GST + 1% Principal). Average interest rates on Indian credit cards 3.5% per month (about 42% annual APR) occurs, and on this interest 18% GST Seems extra.
If you do not make any new spends on the card and keep paying only the minimum due:
| financial aspects | Only on payment of Minimum Due (MAD) | On making lump sum/fixed payment (e.g. ₹5,000/month) |
| initial outstanding bill | ₹1,00,000 | ₹1,00,000 |
| Monthly Interest Rate (APR) | 3.5% per month (42% annually) | 3.5% per month (42% annually) |
| time taken to repay loan | around 13 to 15 years | About 32 months (2.7 years) |
| Total paid only interest and GST | Approximately ₹1,40,000 to ₹1,65,000 | approximately ₹48,000 |
| total amount out of pocket | Around ₹2.40 lakh to ₹2.65 lakh | Approximately ₹1.48 lakh |
(Note: Calculations are based on 42% annual rate and reducing balance. As the principal gradually reduces, the minimum due of 5% also reduces, causing the repayment period to stretch over decades).
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The ‘interest-free period’ of 45-50 days ends: If the bill is not paid in full, the biggest benefit of the credit card i.e. ‘interest-free period’ ends immediately. After this, if you buy grocery or tea worth ₹ 100 from the card, then interest at the rate of 3.5% monthly will start charging from the first day of swiping.
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Additional shock of 18% on interest (GST): Whatever finance charge or interest the banks charge you, as per the rules of the Government of India, 18% Goods and Services Tax (GST) is compulsorily levied on it. That is, if the monthly interest becomes ₹ 3,500, then ₹ 630 additional GST will be deducted.
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Fall of Credit Utilization Ratio (CUR) and CIBIL Score: If your card limit is ₹1.20 lakh and there is a consistent balance of ₹1 lakh, your credit utilization will remain above 80%. Credit bureaus consider this as ‘credit hungry’ behaviour, which causes your CIBIL score to drop rapidly and makes it difficult to get a home loan or car loan in the future.
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Convert bill to ‘Smart EMI’ instantly: If you can’t pay ₹1 lakh in lump sum, convert the bill into EMIs of 6, 12 or 18 months by going to the bank app. The interest rate on EMI ranges from 14% to 18% per annum, which is less than half of the 42% interest rate on credit cards.
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Take a cheap personal loan or gold loan: Clear your credit card bill of ₹ 1 lakh in a single day by taking a personal loan from any bank at the rate of 10.5% to 12.5% and later pay the cheap EMI of the personal loan.
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Balance Transfer Option: Balance transfer to another bank card is available at 0% to 1% processing fee, giving you an interest-free period of 3 to 6 months.
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Immediate stop on card use: Stop purchasing any new goods online or offline from that credit card until the old outstanding of ₹ 1 lakh is fully paid.