What is the credit card minimum amount due? Should you pay it and carry forward the balance

In a credit card monthly statement, you will see two amounts due. One is the minimum amount due (MAD), and the second is the total amount due (TAD). While making the monthly bill payment, the bank usually gives you three payment options: MAD, TAD, and any other amount. Which out of these three should you pay? Each has its own pros and cons.

In this article, we will understand what is the minimum amount due and whether you should pay the MAD and carry forward the balance.

What is the minimum amount due?

In a credit card bill, the minimum amount due or MAD is the smallest/least amount that you can pay to keep your account in good standing. By paying the MAD, you avoid the levy of late payment fees. Your account will not be classified as a delinquent account/defaulter.

The MAD is a small percentage of the overall outstanding amount you have spent using the credit card in a monthly billing cycle. For example, for Axis Bank credit cards, the MAD is 2% of the purchases made in a billing cycle. In the case of ICICI Bank and American Express, the MAD is 5% of the outstanding amount. Similarly, for other bank credit cards, you can check the Most Important Terms and Conditions (MITC) document to know the MAD percentage of the outstanding amount.

The MAD payment is subject to a minimum amount. For example, for Axis Bank credit cards, the MAD is 2% of the outstanding balance, subject to a minimum payment of Rs. 100. Similarly, ICICI Bank and American Express also, the MAD is subject to a minimum payment of Rs. 100.

What does the MAD include?

In the earlier section, we understood how the MAD includes a small percentage of the purchases made using the card during a monthly billing cycle. Apart from that, the MAD includes the following.

1. The card joining and annual fees
2. Any interest charges
3. Any EMIs
4. Any other charges
5. The taxes on all the above charges

While the purchases on the card are charged at a small percentage (2 to 5%) in the MAD, the remaining amounts are charged at 100%. For example, suppose the purchases made using the credit card in a monthly billing cycle are Rs. 10,000 and the card annual fee is Rs. 1,000. The MAD will include Rs. 500 (5% of the Rs. 10,000 purchases), Rs. 1,000 (100% of the annual fee), and Rs. 180 (100% of the 18% GST on the Rs. 1,000 annual fee).

What happens when you pay only the MAD?

When you pay only the MAD, you postpone paying the balance amount and do not eliminate it. Paying only the MAD gives you flexibility with the payment of the balance amount. However, this flexibility comes at a huge interest cost.

Suppose your monthly credit card bill is Rs. 20,000, and you are facing a cash crunch. You decide to pay the 5% MAD, i.e., Rs. 1,000. The balance of Rs. 19,000 will be carried forward to the next monthly bill cycle.

The bank will charge you interest on this Rs. 19,000. Most banks charge a monthly interest rate in the range of 3 to 4%. It translates into a huge annual interest rate of 36 to 48%, making it one of the costliest loans.

Suppose your credit card bill is Rs. 5,000, and you pay only the 5% MAD (minimum Rs. 100) every month. In such a scenario, as per the American Express website, it will take you up to 44 months to pay back the entire outstanding amount in full. As per the Axis Bank website, paying the 2% MAD (minimum Rs. 100) every month will take up to seven years to pay back the total amount in the same scenario.

So, as explained above, if you pay only the MAD every month, you will incur huge interest charges till you clear the entire outstanding amount. These interest charges can drain your personal finances. They can also make you divert money meant for your financial goals.

Pros and cons of paying the MAD

Some of the pros of paying the MAD include the following.

1. Your account remains regular. In other words, it will not be classified as a default.
2. As the MAD has been paid, the bank will not charge late payment fees.
3. As your account remains regular, it will not be reported to credit information companies (CICs) like CIBIL as a delayed account. Your credit score will not be hit.

Some of the cons of paying the MAD include the following.

1. You will start incurring huge monthly interest charges of 3 to 4% of the outstanding amount. It may take many months or a few years to clear the entire outstanding amount when you pay only the MAD every month.
2. There is a risk of falling into a debt trap. The huge monthly interest charges, when carried forward for a few months, can quickly add up to an unsustainable amount and spiral out of control.
3. A higher credit utilisation ratio (CUR) can contribute towards impacting your credit score negatively. If you keep paying the MAD every month, the remaining outstanding amount will be carried forward every month. If the outstanding amount exceeds 30% of the total credit limit available, it will result in a higher CUR. If the CUR is consistently higher than 30%, it will impact the credit score negatively.
4. If you keep rolling over your debt month after month for a long time, it can affect your credit worthiness. Getting new credit cards or loans can be challenging as banks will look at you as a high-risk customer.

Should you pay the MAD and carry forward the balance?

You must always aim to pay the entire monthly credit card bill before or by the due date. If you fall short by some amount, pay whatever is available over and above the MAD. Also, you must try and arrange for the remaining amount at the earliest and clear the entire outstanding amount as soon as possible.

Paying only the MAD is not recommended. If you pay the MAD, you will incur huge monthly interest charges. The outstanding amount and interest charges can quickly add up and become unsustainable. It can put you in a debt trap and ruin your financial life.

The MAD flexibility should be used as an exception during a financial difficulty. Paying only the MAD should not be the norm. When you use the MAD flexibility during times of financial difficulty, it can be a lifesaver. However, when you make paying the MAD a norm, it can ruin your financial life. You should use credit cards for the features and benefits they provide and pay the entire outstanding every month on time.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.