What is the minimum amount due on a credit card

Any individual who wishes to get a new credit card considers two key factors before selecting one – the applicable interest rates and the rewards. The expenses that an individual can incur while repaying their credit card dues depend on various factors including their card’s interest rate and whether or not they pay their dues on time. The fee that an individual must pay to avoid any extra penalty fees is called the ‘minimum amount due’.

You can easily know your minimum amount due at the end of a particular billing cycle by checking your credit card statements. These statements contain a detailed description of your expenses using your credit card including the interest rate, the minimum amount due, and the due date. An effective way to repay your bills on time is to automate them. IDFC FIRST Bank’s mobile banking app has the Autopay feature that helps customers automate their regular bill payments to avoid any late fees. 

What is the minimum amount due on a credit card?
 

As a credit card holder, you must know about the minimum amount due at the end of each billing cycle in order to maintain high creditworthiness by repaying their bills on time. If you wish to maintain a healthy credit profile, you must pay more than the minimum amount due at the end of a billing cycle. The ‘minimum amount due’ is a percentage of an individual’s outstanding balance which they must pay to avoid penalties and keep their creditworthiness from worsening. –

Suppose individual A has an overall outstanding balance of ₹30,000 and that the bank requires them to repay 5% of their outstanding balance as a minimum amount due. In this case, A’s minimum amount due will come to ₹1500. They, therefore, have to pay ₹1500 to avoid any additional penalty charges. Does this mean that A does not have to pay the remaining amount (₹28,500)? Not at all. If not paid, the bank will levy additional interest on this amount, which A must pay while repaying the amount. Furthermore, a late payment will have a negative impact on A’s creditworthiness.

Hence, any credit cardholder’s ‘minimum amount due’ is the amount that they must pay at the end of a billing cycle to avoid penalty fees.  

IDFC FIRST Bank offers theinnovative FIRST SWYP credit card that comes with zero interest charges on EMI and all you need to pay is a fixed monthly conversion fee for eligible purchases. The FIRST SWYP credit card also comes with a unique reward program, and exclusive shopping, movie, and travel benefits.

How is the minimum amount due on a credit card calculated?
 

As mentioned earlier, the bank calculates your minimum amount due based on your outstanding balance. Your minimum amount due is a percentage of your overall outstanding balance. This means that you can check your monthly credit card statements at the end of every billing cycle to check your minimum amount due. The following table illustrates the calculation of the minimum amount due in various repayment scenarios –

Please note that the above calculations could change based on the bank or credit card company offering the credit card. In the first instance, where the outstanding balance is ₹ 10,000, the total minimum amount is the least. However, in the third instance, where the outstanding balance is the highest (₹ 50,000), the total minimum amount due is the highest too. Therefore, the total minimum amount due for any individual increases with an increase in the total outstanding balance.

How does minimum amount due on credit card work?
 

The minimum amount due applicable to your credit card dues – as mentioned earlier – is a percentage of your total outstanding credit card balance at the end of a billing cycle. This percentage is fixed by the bank in advance. If, at the end of a billing cycle, you pay only the minimum balance due, you will avoid any late payment charges and your credit score will not be affected negatively in the near future.

You can also maintain a good relationship with the bank by repaying your minimum amount due on time. However, you must form the habit of paying more than this amount since it can lead to an accumulation of debt in the long run. If you only pay the minimum amount due, most of your repayment amount will be directed towards paying the interest component of your credit card dues. Therefore, your principal amount will not reduce. In order to reduce the principal amount, you must pay more than the minimum amount due at the end of every billing cycle.

Benefits of paying the minimum amount due on Credit Cards
 

Here are the major benefits of paying the minimum amount due on your credit card –

1. You can avoid late payment fees: Late payment fees impact your capability of repaying your credit card dues and also often result in a reduced credit score. The primary benefit of paying the minimum amount due is being able to avoid late payment fees.
   
   
2. The status of your credit card account remains positive: Repaying your minimum amount due helps you maintain a good relationship with the card-issuing bank.
   
   
3. Your credit score isn’t impacted in the short term: If you only pay the minimum amount due on your credit card, you can rest assured about your credit score being negatively impacted in the short term.
   
   
4. You can easily manage your credit utilisation ratio and thereby increase your credit score: If, in case of a financial emergency, you wish to spend less on your credit card dues than usual, you can use the minimum amount due to your advantage and avoid late payment fees. Paying the minimum amount due, therefore, also helps you manage your credit utilisation well.

Risks of paying the minimum amount due
 

You might be faced by several financial risks if you choose to only pay the minimum amount due on your credit card –

1. Your creditworthiness takes a hit: One of the benefits listed in the previous section is ‘no impact on your credit score’. If you are wondering how this can also be a disadvantage, please note that paying only the minimum amount due does not impact your creditworthiness in the short term. However, if your outstanding balance piles up over time, your creditworthiness is negatively affected.
   
   
2. Your debt period gets extended: If you only pay the minimum amount due, you will be essentially extending your debt period. This can lead to your credit card becoming a long-term financial burden, which might impact your ability to achieve other financial goals.
   
   
3. You might end up paying more than the original amount borrowed: Paying only the minimum amount due can lead to an accumulation of interest. By doing so, you can end up paying more than you had borrowed.
   
   
4. Your credit utilisation ratio might increase: One of the results of maintaining a high balance is an increased credit utilisation ratio which also negatively impacts your credit score.

Understanding the credit card billing cycle
 

When you sign up for a credit card, the bank informs you about your credit card bill generation date. This is the date on which your credit card bill is generated. If your credit card bill is generated on the 5^th of each month, your credit card billing cycle will start from the 6^th of the previous month and continue till the 5^th of the current month. All transactions made using your credit card between these two dates will reflect in your monthly credit card statement. These credit card statements will include payments and cash withdrawals via your credit card. For different card-issuing banks, the credit card billing cycle varies between 27 and 31 days. You can check your credit card statement to know the duration of your credit card billing cycle.

Tips to avoid late payment fees
 

Here are some tips you can follow to avoid late payment fees and also improve your credit score –

1. Pay more than the minimum amount due: If possible, you must try and pay the total outstanding amount on your credit card at the end of every billing cycle. Paying the minimum amount due can help you avoid late payment fees and keep your credit score from plummeting, but the situation might worsen over time. If you cannot pay the entire amount, decide on a percentage of amount (above the minimum amount due) that you will pay monthly to avoid any accumulation of interest.
   
   
2. Regularly check your credit card statements: Your credit card statements contain important information such as credit card balance, the minimum amount due, and interest rate. You must check these statements to be aware of your minimum amount due and overall outstanding balance.
   
   
3. Automate your credit card payments: The best way to make sure you don’t miss any payment is by automating your credit card EMI payments. IDFC FIRST Bank customers can do this using the Autopay feature on the IDFC FIRST Bank mobile banking app.
   
   
4. Monitor your spending patterns and budget accordingly: Efficient budgeting can help you plan for your credit card bill repayments more effectively.

Conclusion
 

Understanding the concept of the minimum amount due on your credit card is essential for maintaining financial discipline and a strong credit profile. While paying this amount can help you avoid late payment fees and safeguard your credit score in the short term, it is not a long-term solution. To prevent accumulating interest and prolonged debt, always aim to pay more than the minimum due or the total due amount. IDFC FIRST Bank's online payment features such as autopay, internet banking, and UPI can simplify timely payments, ensuring financial well-being. Enjoy exclusive privileges with IDFC FIRST Bank credit cards without the worry of missing out on payments.