Harish had gone overboard with spending on his credit card for his sister's marriage. When his credit card bill appeared, he was rather happy to see that the minimum amount due was only a small amount.
Let's now cite this with an example. Let's say Harish's outstanding on the credit card bill was Rs 60,000. Now the bank would ask him to make a minimum payment of Rs 6,000 only (usually 10% of the outstanding).
What happens is that the remaining Rs 54,000 will attract an interest rate of 2.5% to 3.5% per month, depending on the bank. That is a whopping 30% to 42% per cent annually as interest payment.
Now every time you have fresh transactions financial charges would apply. What this means is that you lose the grace period. You are now struck by a double whammy.
It all translates into a huge amount of interest rate and before you realize, you are just servicing the interest. It is a trap. Therefore, when your credit card bill comes, just ignore the minimum amount due and pay the entire amount due.
Yes, there would be times when you cannot pay the entire bill, if the amount outstanding is rather high.
What If I cannot pay the full credit card bill?
If your outstanding is really large and you have been credit worthy in the past, the bank will call you and ask you if you want to convert the credit card outstanding into 10 EMIs. The interest rate on this is around 12-14 per cent, depending on the bank.
The other way is to try and take a personal loan and pay off the credit card. That would come at a maximum interest rate of 18 per cent per annum, which is better than paying 36-42 per cent annually.
Banks have become very clever. If they know that you are in the habit of paying the entire amount, they tend to loose money by giving you the 45-days grace to pay the credit card bill.
So, they gain nothing from you, if you make timely payments. This is when an executive from the bank will call and ask, if you want to convert the credit card outstanding to a loan. At least they will gain some interest from you.
We wish to emphasize that as soon as you see your credit card bill, just ignore the minimum amount on the bill and pay the entire amount. You could land yourself in a trap, if you pay just the minimum amount.