Credit cards bring financial ease and freedom on spending by postponing ones debts to a later date. They are now widely used across India to make both small and big purchases due to the convinience and security in payments that they come with.
However, when it comes to paying the bills, people choose to act on it differently. Some choose to pay as much of the outstanding amount as possible, while others choose to just pay the minimum amount due on the card. Infact, paying minimum amount due has reportedly become a habit among users as their spending habits change, making the smaller amount payable an easier way out.
This minimum amount due on credit card is usually 5 percent of the outstanding balance and as the name suggests, the user is required to pay this amount to keep the card active. Paying it also means that your service provider will not charge you a late payment fee. But the habit of paying the minimum amount could land you in a debt trap.
If you are one of those people who only pays the minimum amount due on credit cards, here are 5 reasons why you should start paying more.
If you are looking to improve you credit score, which will be helpful to get a loan at an attractive rate in the future, a credit card is a good way to start. Also, a credit card is also where you could go wrong.
If you pay an amount larger than the minimum amount due, it will help maintain a good credit utilization ratio. Credit utilization ratio is the amount of balance on credit card when compared to the credit limit. When you only pay the minimum amount due, the gap between your balance due and the credit limit narrows, hurting your credit score. This is because it shows your indiscipline in paying off debts in a timely manner and banks see you as a potential defaulter of loan and will not be willing to take the risk.
Your inability to pay a little more than minimum amount due now could potentially hurt your home loan plans in the future.
Additionally, a better credit score will also mean than the banks will offer you a bigger credit limit that will come handy in times of crisis.
Debt will pile up
As you keep paying the minimum, your debt piles up and at one point it will overshoot the credit limit. This will not only mean that you will have a bigger mess to clear, but your credit card will become useless. Its functionality will cease to be of any use once you exceed the spending limit. Not to forget the negative credit score. It is always better to act ahead of time by paying off as much of the balance as you can.
The longer you take to pay your dues, the higher the interest amount that will pile up. You may be saving a little by paying the minimum amount due, but you will suffer heavy losses in the long run.
A study by an American personal finance website NerdWallet in 2018 showed that households in the US that pay only the minimum amount due on credit cards usually end up paying twice the interest rates. This is because credit cards attract some of the highest interest rates among other debt instruments.