DT Personal Finance: Don’t pinch pennies when settling credit card dues

CHENNAI: Credit cards can be useful. Very useful in fact. But you need to know how to use them right to derive benefit. It is similar to a knife. It can work for you as well as against you. And credit cards sometimes get a bad name because people using them don’t know how to handle them well. So how exactly should one handle credit cards?

First, if you have been a credit card user, you should understand the concept of Minimum Amount Due(MAD). This is an option provided by the credit card issuers which allows you to pay just around 5% (called the minimum amount due) instead of paying the full bill each month. Suppose you spend Rs 10,000 on Oct 29, 2023, and your credit card bill comes on November 1, then you have the option of just paying 5% of the total amount due of Rs 10,000, i.e., Rs 500.

This looks attractive that you can just pay about 5% instead of the full amount. You may feel that if the credit card is giving you this cool option of delaying full repayment, then why not. But this is what gets people down the wrong path. One should not forget that credit card outstanding amounts attract almost 3-4% interest per month.

Let’s continue the previous example further. You spent Rs 10,000 on October 29. The bill comes on November 1, and you have a due date of November 15. Now you have the following choices to repay your card dues:

Choice 1 – The first option is to pay the full Rs 10,000 due amount before November 15. In this case, since you have cleared the bill in full before due date, you naturally don’t get charged any interest.

Choice 2 – The second option is to pay the MAD (Rs 500 in this case as 5% of Rs 10,000). Without getting into too many mathematical details, please understand that you will be charged interest on Rs 9,500 (the difference between Rs 10,000 full due and Rs 500 minimum amount due you paid).

Let’s further extend the example in second choice. Assume that once you have paid the Rs 500 as the MAD (say on Nov 10), you again make a purchase of Rs 5,000 on November 17. The next bill is generated on December 1. So, what will be your full outstanding bill amount?

It will be Rs 9,500 (from the first month’s bill), Interest on Rs 9,500, the second transaction of Rs 5,000, and also the interest on Rs 5,000 from November 17 to December 1. What this means is that if you have an unpaid amount from the previous bill (and you have just paid MAD and not the full due), you don’t get any interest-free period for your second transaction. You will be charged interest from the very next day of the transaction.

I have seen many young credit card users make it a habit to just pay the MAD. But as we saw in the above example, this can result in a lot of interest being paid by the card user. Don’t forget that credit cards charge an interest rate of 35-40% per annum. Do not make the mistake of just paying the minimum amount due on your credit cards. Ensure you clear your dues in full each time. If you are unable to do so, it means that you are spending more than you should and it should serve as a warning.