Paying just the minimum amount due on your credit card each month might seem manageable, but it can lead to a costly cycle of debt. This practice, known as the minimum payment trap, means your remaining balance accrues interest, often at high rates, significantly increasing the total amount you owe over time.
How does the minimum payment work?
When you receive your credit card statement, it will show a total balance and a minimum payment due, which is typically around 5% of the total balance or a fixed amount, whichever is higher. Paying only this minimum amount keeps your account in good standing and avoids late fees, but it does not prevent interest from being charged on the remaining balance. For example, if you have a balance of ₹50,000 at an interest rate of 3% per month, paying just the minimum can lead to substantial interest accrual.
Why is it called a 'trap'?
The term 'trap' is used because paying only the minimum can feel manageable but ends up costing you significantly more in the long run. The interest continues to compound on the unpaid balance, meaning you pay interest on interest. This can result in your balance growing faster than you can pay it down, especially if you continue to use the card. Over time, you might end up paying double or triple the original amount borrowed.
How does it affect my CIBIL score?
Paying only the minimum amount doesn't directly hurt your CIBIL score, as it shows you are meeting the minimum requirements of your credit agreement. However, the growing interest and prolonged debt can increase your credit utilization ratio, which can negatively impact your score. A high credit utilization ratio (above 30%) is a red flag to lenders, indicating that you may be over-reliant on credit.
What are the alternatives to avoid this trap?
To avoid falling into the minimum payment trap, aim to pay more than the minimum amount due each month. Ideally, pay off the full balance to avoid any interest charges. If that’s not possible, try to pay as much as you can above the minimum. Consider consolidating your debt with a lower-interest loan or transferring balances to a card with a 0% introductory rate to save on interest costs.
This is general information and not financial advice tailored to your specific situation.