Why paying only the minimum due on your credit card is a costly mistake

Paying only the minimum amount on your credit card bill might feel like a relief, it leaves extra cash in hand and helps avoid late payment charges. However, this short-term comfort can quickly turn into a long-term financial burden, as repeated minimum payments lead to mounting debt and high interest costs.

Over time, this habit can significantly impact your credit score, making it harder to qualify for low-interest loans or new credit cards. To maintain healthy finances and avoid the credit card debt trap, it's essential to pay more than just the minimum due whenever possible. Let's dive deep into this today and look at this concept carefully.

But first, how do credit cards work?

Using a credit card simply means borrowing money from the bank to cover your expenses, which you are expected to repay by the due date. Most banks offer customers two repayment options, either pay the full amount or just the minimum due, which is a small percentage of the total balance.

Paying only the minimum once in a while may not hurt, but doing it on a regularly basis can lead to serious financial problems. This will happen as your unpaid balance keeps piling up and starts attracting high interest charges. Over time, these small unpaid amounts snowball into a large, unmanageable debt that costs far more than the original spends.

Due to all these factors it is prudent to be careful with the manangement and usage of your credit card from the start itself. Good financial management, keeping debt low, not allowing the credit utilisation ratio to go out of hand are some simple yet powerful ways to keep your credit profile neat. 

Let's understand it better with an example:

For example, if your credit card balance is say ₹50,000 with an annual interest rate of 24%, your minimum payment may be just ₹2,000. Now, paying only the minimum means ₹48,000 remains unpaid, which will start attracting high interest. If it is not managed efficiently.

This interest keeps compounding each billing cycle, making it difficult to clear even the principal amount. Hence, over time, your credit card debt can spiral out of control, impacting your financial health and credit score.

A high debt on credit card can also result in causing psychological problems and personal life complications. That is why do keep in mind, your personal finance is directly linked with your personal life.

What impact does paying just the minimum have on your credit score?

A credit score, ranging from 300 to 900, reflects your creditworthiness and financial discipline. Timely payments and responsible credit usage push your score closer to 900, improving loan eligibility.

Still, regularly paying only the minimum due can lower your credit score, signalling poor debt management to lenders. A low score can hurt your chances of getting loans or credit cards at favourable terms.

Minimum payments and the snowball effect

Let's learn how paying only the minimum amount every month can land you in financial problems. Suppose you pay only the minimum amount for the first month and manage to avoid a late fee. But then, you continue to do it for the second month, then for the third month, and so on.

Before you will realise it, your debt will accumulate and it will go out of your control. Just like a snowball rolling down a hill and getting bigger, your debt will accumulate and attract interest.

How to manage it?

Here are a few ways you manage credit card debt and avoid snowball effect:

• Pay more than the minimum amount: Try to pay more than the minimum amount, even if it is a small amount. It will reduce your accumulated debt and avoid high interest charges.
• Create a budget: Create a realistic budget for yourself and identify areas where you can cut unnecessary expenses. It can be as easy as less dining out or avoiding shopping for branded clothes.
• Set small targets: Set small, challenging yet achieving financial targets for yourself. For example, paying high-interest debt first or prior to others.
• Avoid new purchases: Avoid new purchases through credit cards when you are already struggling to pay your dues. Instead, use your savings account so that your debt burden doesn't accumulate further.
• Track progress: Regularly monitor your performance and debt obligations to get an idea of where you stand financially. Make necessary adjustments if needed, or take expert help when things do not go as you planned.

Why is paying only the minimum on a credit card bad?

Paying only the minimum on a credit card increases your interest burden, prolongs debt repayment, complicates the entire repayment strategy and negatively affects your credit score. It signals poor financial management to lenders, reducing your chances of getting loans or credit at better terms.

Final words

Just like when you start an SIP and your investments accumulate, creating a snowball effect, your debt can also accumulate if not paid over time. Moreover, it will attract interest penalties more than what your actual debt amount is.

Hence, by bringing some small changes in your financial habits, like avoiding using credit cards for every single payment, you can improve your financial position significantly. Consult a financial advisor and seek help to improve your financial health when needed.

Padmaja Choudhury is a freelance financial content writer. You can reach out to her at padmaja@padmajachoudhury.com.

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