Credit Card Update: A large number of people are using credit cards these days, so this news may be important for you. When your card statement arrives every month, and the minimum amount due is mentioned, many users assume that paying that amount is sufficient. But the real question is whether paying only the minimum amount protects your credit score or can this habit harm you in the future.
The real meaning of Minimum Amount Due
Minimum Amount Due is the minimum amount that you can pay by the due date to avoid late fees and default. It is usually a small portion of the total outstanding balance, ranging from 5 to 10 percent. For example, if you have a card balance of ₹50,000, the MAD could be around ₹2,500 to ₹5,000.
Does Paying the Minimum Amount Immediately Lower Your Score?
If you pay the minimum amount due on time every month, you’re not technically considered a defaulter. Your late payment doesn’t appear in the bank and credit bureau records, so it doesn’t have an immediate negative impact on your credit score.
How Credit Scores Gradually Affect Your Credit Score
However, making only the minimum payment for a long time can be risky for your credit profile. This increases the credit utilization ratio and leads to higher interest rates on the remaining balance. If a large portion of the card limit is consistently used, credit bureaus may interpret this as a sign of financial stress, which can lead to a gradual decline in your score.
The Hidden Disadvantages of Paying the Minimum Amount
Paying only the minimum amount may seem like an easy option, but it can come at a heavy price. Interest can range from 30 to 45 percent annually on the remaining balance, rapidly increasing the debt. Since the principal balance doesn’t decrease, the debt persists for a long time. This could impact future loan or EMI approvals, and banks may hesitate to increase your credit limit.
When is Paying the Minimum Amount Considered Right?
Paying the minimum amount may be necessary in certain circumstances, such as sudden financial difficulties or a temporary cash flow shortage. In such circumstances, it may be a temporary measure to avoid default. However, making it a regular habit is not considered right.
What should be the best strategy?
To maintain a strong credit score, one should always strive to repay the entire outstanding amount. If this is not possible, paying at least half the amount will reduce the interest burden and protect the credit profile.