Credit card: How paying more than the minimum can save you money | Mint

Credit cards are a great way to make smart payments and earn rewards and great offers on your favourite brands every time you make transactions from your credit card. With credit cards you don’t have to worry about paying cash immediately as the lender makes the payment on your behalf and you can relax and not think about the repayment until the due date. However, if not used mindfully, credit cards can put you in financial stress which can ultimately lead to debt traps.

Credit cards come with a feature of minimum repayment amount that you can use if you have a financial constraint and for some reason are unable to make full payment of your bill. Let us understand what is minimum bill payment and why it is important to pay more than the minimum amount of your credit card bill:

What is minimum bill repayment?

Credit card payments require a minimum repayment with the amount normally being about 5% of the current outstanding bill. This may appear as one of the simplest ways to approach payment, but it can make you fall into a heavy debt trap. Paying the minimum amount will transfer the remaining balance to your next cycle and ultimately you will be required to repay the amount of the current month as well as the previous remaining balance but with heavy interest.

Pros

Reduced interest accrual: If you pay more than the minimum amount, the remaining amount to be paid reduces which will also mean that the interest amount will also significantly reduce. Hence, with this you can save a lot of money in the long run.

Quicker debt repayment:Repaying more than the minimum amount due gives you the ability to avoid extended credit card debt and regain your financial independence faster.

Enhanced financial flexibility: Maintaining a high available limit on your credit card also helps you save your money from paying heavy interests on bills as well as keep your credit balance available for any unforeseen emergency.

Positive credit score impact: Lowering your credit card dues means that your credit utilisation ratio is healthy and is improving, which has a direct impact on your credit score, and as a result, can improve your credit worthiness. 

Cons

High interest accumulation:The interest charged on credit cards is even higher than personal loans. This is because when you pay only the minimum amount on the credit card statement, the balance starts charging interest. As a result, the amount becomes much higher with the added interest and may lead you to a heavy debt burden.

Extended repayment period:Using the minimum payment option means that it will take you much longer to completely pay off all the credit. That is because when you make a minimum amount payment, most of that money goes toward paying the interest and a huge chunk of the principal is still untouched. Therefore, where you would have taken a couple of months to completely pay off the bill, it may take you a long time to repay the bill with the added interest charge.

Credit score impact: Making a minimum payment may help you avoid late payment charges and penalties. However, this will increase your credit utilisation ratio which will directly impact your credit score and deteriorate it. This way you might temporarily save yourself from damaging your credit card profile, however, this will definitely damage your chances of getting favourable loan deals in future.

Unavoidable debt trap:If you continue paying the minimum amount due every month, you will soon find yourself into a never ending cycle of repaying the bill with heavy interest. Soon even the minimum amount may become impossible to repay which will then result in penalty fees and substantially lowering your credit score.

Tips to pay more than the minimum amount due on credit card

Aim for full payments: Set aside a certain amount of funds every month to pay your credit card dues in full or at least aim to pay more than the minimum required amount.

Avoid unnecessary spending: Avoid using your credit card for everyday purchases such as groceries and food. With this you will be able to avoid unnecessary transactions on your card and avoid a heavy bill later.

Prioritise high interest debt:In case you have many credit cards and you are unable to pay the bills fully, you should prioritise the bill with the highest interest rate and amount.

Use bonuses wisely: Spend your bonuses, tax refunds or other savings toward your credit card debt if you are unable to pay the bills on time.

In conclusion, it is important to understand that credit cards can cause extreme damage to your credit score as well as your overall financial health. Making the minimum payment may seem like an easy escape but it only adds more burden to you later. Hence, always be mindful of your transactions and avoid impulsive spending on your credit card and aim at paying the full bill in one go. Avoid taking too many credit cards which you can not afford and make informed decisions to avoid any future debts.

(Note: Using a credit card carries its own set of risks)