Minimum Amount Due: A Credit Card Trap?

What are the items that you look into when you receive your credit card statement? First and foremost is the total amount due, then comes the minimum amount due. There are some people who pay off their entire dues, and many others who pay only the 'Minimum Amount Due' (MAD). The acronym makes for a strange coincidence, as paying only the minimum amount is madness indeed in more senses than one. Let's see why this is so.

As a credit card user, you first need to understand what MAD is. This is a portion, usually 5%, of the total amount due on your credit card. As the name suggests, the Minimum Amount Due is the minimum amount that you must pay towards the purchases made in that month to avoid attracting a penalty for default on payment of card dues.

If you continue to pay only the MAD, it can be said that your outstanding payment is converted to a loan with high interest rates. What 'high' means here is an interest rate that varies from 36%-42% per annum. The only benefit that you get from paying the MAD component is that no late payment charges or penalties are levied on your dues.

Of course, you need to remember to pay the MAD by the due date too, otherwise the following charges will be levied:

• Late Payment Charges
• Default Charges
• Processing Fee
• Transaction Fee
• Service Tax
• APR (Annual Percentage Rate)

However, if you are paying only the MAD and not doing any fresh purchase, you will have to pay interest on the balance amount including on the interest due until the entire amount is repaid.

Another pitfall of paying only the MAD is that you are devoid of the free credit period that your card offers. In addition, the interest on any purchases is calculated from the first day itself. Your credit history or score may get hampered if you do not pay the MAD on time. In today's day and age, where your credit history is becoming more important than ever and is tracked closely by multiple agencies, a blot on your creditworthiness is really the last thing you want.

Let's take an example wherein the total amount due on your card is Rs 10000, the APR is 42% and the minimum amount due is Rs 500. Consider that you choose to pay only the MAD. In this case, you will have to pay this Rs 500 for 35 months, which will incur you an interest burden of Rs 7499. Therefore, you end up paying Rs 17499 on the due of Rs 10000 that you had spent 35 months ago!

It is clear then, that it is always better to clear your credit card dues in entirety before the due date and to keep your credit limit free rather than entering a trap where you end up paying high interest at progressively higher interest rates.