The risks of making only minimum credit card payments

As every payment method turns digital, credit cards have become an indispensable tool for financial transactions across the country, as they are convenient and flexible. However, a common trap into which most cardholders fall is paying only the minimum amount due every payment cycle. Although this practice may be manageable initially, it can lead to financial problems over time.

  1. Understanding the minimum amount due

The minimum amount due on a credit card is the lowest amount you can pay before the due date to maintain the account in good standing and not incur a late charge. It is typically a percentage of the amount due. Paying it does not clear the full debt—it only delays repayment and helps avoid penalties.

  1. The snowballing effect of accumulating interest

One of the greatest dangers of the minimum payment is that interest on the balance continues to be charged. Credit cards carry high interest rates, and if you fail to pay the entire balance, interest is charged on what remains. This creates a snowball effect, making the debt a quick-growing entity and difficult to repay.

  1. Impact on credit history

Paying only the minimum amount each time hurts your credit score. Carrying high balances relative to your credit limit raises your credit utilisation ratio, which is a significant component of the formula used by credit scores. The higher your ratio, the lower your credit score and the more difficult it will be to obtain loans or more favourable interest rates.

  1. Loss of interest-free period

Credit cards often provide an interest-free period on new purchases if the old balance is paid in full. However, this benefit is only available if the entire outstanding balance is paid—not just the minimum amount due. Subsequent transactions begin accruing interest immediately, which adds to the credit card cost.

  1. Extended debt repayment period

Paying only the minimum amount due delays full repayment of the debt. For instance, if you have a balance of ₹50,000 at an 18% annual interest rate, it could take years to repay if you make only minimum payments. The longer repayment period means paying much higher than the amount you borrowed.

How do you avoid the minimum payment trap?

There are several ways to escape the minimum payment trap, including:

  • Pay more than the minimum: Pay more than the minimum amount due since small extra payments can save on interest and cut the repayment time short.
  • Budgeting: Prepare a monthly budget so that expenses can be handled well, and enough money is left over to settle credit card balances.
  • Debt consolidation: If you have several debts and find them too much to manage, try consolidating them into a single loan at a lower interest rate.
  • Seek financial advice: Consult financial advisors or credit counselling agencies for tailored advice on managing and paying off debt.

Conclusion

Making only the minimum payment on your credit card will get you by for a bit, but it will destroy your finances in the long term. To be financially healthy and out of debt, you must pay your total outstanding amount whenever possible. You can conquer credit and have a healthy financial future by being responsible with money and getting expert advice when needed.