If you spend Rs 10,000 on your credit card and the bill says you have the option to pay the minimum amount of Rs 500 only, then you are in a trap.
Credit cards have become very useful in this era of cashless transactions. Many times, even if there is no balance on the spot, it can be spent through a credit card and pay it later. However, using credit cards heavily and making only the minimum payment can be dangerous. Even though it sounds a bit high, but if you understand the credit card interest system, then it will not look wrong. If you spend Rs 10,000 on your credit card and the bill says you have the option to pay the minimum amount of Rs 500 only, then you are in a trap. If you use a credit card then you have three options…
Interest is charged up to 40% in a year: The first option is to pay in full, the second option has the option of paying the minimum amount due i.e. 5%. In case of the minimum amount due, interest is charged on 95% of the balance amount. MAD is a scheme provided by card companies, in which you can pay 5 percent of the bill instead of the full amount. In the next billing period, it comes along with 3-4% interest. In a year it can be more than 40%.
How right is it to make the minimum payment: If you use the credit card more in any one billing period, then it is natural that your bill will come high. The real problem starts when you miss not only the full payment but also the minimum payment. On this, you may have to pay a penalty of up to Rs. However, the credit card holder should avoid the minimum payment. The reason for this is that once the minimum payment is made, the remaining balance comes in your next bill and interest continues on this as well.
What is the billing period: Suppose your credit card arrives on the 10th of every month, then your new month will start from the 11th and will continue till the 10th of the next month. The transactions done by you during this time will be reflected in your bill. This may include shopping, cash withdrawal payments and other expenses.