Although this appears quite tempting but it is not a recommended move at all. Not only you are made to pay the late fee, but also the interest which continues to pile up until you clear your dues. For the uninitiated, rate of interest on most credit cards range between 2-3 percent a month. This means around 24-36 percent in a year.
Disadvantages of paying the minimum due
I. You lose out on an interest free period of 45 days: Most credit cards offer interest-free periods which may stretch up to 45 days. But this is available only when you clear the dues on time and not by paying the minimum due.
II. Debt accumulates: when you pay the minimum due, you carry forward the remaining 95 percent of credit card debt to next month. And this goes on until you clear your due. This leads to a huge pile of debt.
III. Bad financial debt: The best advantage of credit card is that you can borrow money without having to pay interest on it. But when you fall into the temptation of paying only the minimum due – you build a bad financial habit of kicking the can down the road.
IV. High credit utilisation ratio: When you keep your credit card unpaid, your credit utilisation is likely to remain high. CUR is computed by dividing total available credit with the credit availed on the card. For instance, when your credit limit is ₹10 lakh and you have used ₹8 lakh out of which you have paid the minimum due of ₹50,000 – your credit utilisation ratio will turn out to be 7.5 lakh/ 10 lakh i.e., 75 percent. Ideally, the CUR should be 30 percent or lower.
V. Impact on credit score: Another disadvantage of keeping high debt on your credit card is that it adversely impacts your credit score.
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
