InvestorQ : Can you tell me how minimum amount due works?
sanjana Tulsiani made post

Can you tell me how minimum amount due works?

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Anusha Savla answered.
2 years ago

Minimum amount due, as the name suggests, is the minimum amount your credit card company allows you to pay to avoid paying any late payment penalty. Payment of the minimum amount due amount helps an individual who is undergoing a liquidity crunch.

However, one must ensure he/she doesn’t only keep paying minimum amount dues as that will be detrimental to the individual’s credit history.

When a user pays the minimum amount due, his/her payment is first directed towards payment of the interest.

Let’s consider an example: Say you have outstanding dues of Rs. 10,000. For the sake of understanding, say your minimum amount due is Rs. 1,000, of which a majority or Rs. 800 will be directed towards the payment of interest, while the remaining Rs. 200 will go towards principle repayment.

Thus, at the end of the next billing cycle, you will have the balance of Rs. 9,800 apart from the interest to be paid and GST. This amount is likely to increase as this situation assumes you didn’t use your card at all the previous month. If you’d have used your card to purchase items worth say Rs. 3,000, then the balance will be Rs. 12,800.

It is on this amount that the credit card company will levy high interest rates. And the higher the amount, the resultant payable amount will only keep increasing.